Under every lease, there are generally provisions governing the situations where a tenant can assign a lease, and when this is deemed an assignment of lease. Often, a change of control of a corporate tenant entity will be deemed an assignment under that lease’s terms. Each lease will contain its own provisions surrounding when a change in control will occur and whether this will trigger a lease assignment.
As a tenant, you must be aware of these change in control clauses, and their practical effect. This article will set out when a change of control may be deemed to occur and the important implications of the inclusion of change of control clauses in leases.
What is a Change in Control of a Tenant Entity?
Each individual lease will generally define the trigger events that cause a change in control of the tenant entity. A change in control for a corporate entity generally occurs when either a different person or group of persons controls:
- the composition of the board of directors; or
- more than 50% of the shares that give a right to vote at general meetings of the tenant or holding company.
Where the tenant entity is not a corporate entity, generally:
- for an ASX Listed Entity, if the tenant ceases to be so listed or ceases to be wholly owned by a corporation that is so listed.
- for a unit trust, if there is any change in the ownership of units in the unit trust or a holding trust which results in a change in control of the unit trust.
Whilst the above are some examples of common provisions that trigger a change in control, the actual trigger events in each lease may vary drastically. You should carefully review them to ensure you are aware of any events that may trigger a change in control.
This guide will help you to understand your options when you purchase a business with leased premises.
Effect of a Change in Control
When a change in control occurs, this is generally deemed an assignment of the lease. Due to the change in control of the tenant entity, the entity has changed, triggering an assignment of lease. Most leases will require a tenant to seek the landlord’s consent before an assignment of lease occurs.
Suppose a change in control occurs, and did not seek the landlord’s prior consent (in the form as required by the landlord where prescribed in the lease itself). In that case, this may be a breach of the lease. This may entitle the landlord to take further action, including terminating the lease.
If you are not aware of the events that may trigger a change in control, you may unknowingly make changes to the tenant entity. This can inadvertently cause a change in control.
Continue reading this article below the formOther Issues to Be Aware Of
An important consideration is the relationship between change in control clauses and any clawback provisions in a lease. Landlords often require that you pay back the incentive during a lease assignment.
You should carefully review the provisions that will apply if a lease is assigned and consider how these will affect you. A change in control may breach your lease, and it can also have monetary consequences. A lease may include provisions requiring a tenant to enter into a new lease upon assignment or allow the landlord to change other lease provisions. You should note any such provisions to ensure you are aware of their implications before any change in control occurs.
Actions You May Take
It is important to carefully review change in control provisions. Consider their practical implications when reviewing the lease. Suppose you know that throughout the term of the lease, a change in control is likely to occur. In that case, you should seek to amend the provisions to accommodate these changes.
Suppose you cannot amend the change in control provisions. In that case, you should ensure you seek legal advice regarding the provisions. Then, take note of any events that will trigger a change in control. Throughout the lease term, you should ensure you monitor any changes in the tenant entity that may affect the control. Then, you can take note to seek the landlord’s consent where appropriate.
Key Takeaways
Before entering into a lease, you must understand any change in control provisions in the lease and their implications. You should ensure a lawyer reviews any such provisions and generally seek to amend them, especially where you know you will be unable to comply with them. If change in control provisions remain in your lease, you should take due care to note any events that cause a change in control, to ensure you seek the landlord’s consent where required.
If you have any questions about change in control provisions, our specialist property lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A change in control for a corporate entity generally occurs when either a different person or group of persons controls the board of directors or a majority of the voting shares.
Most leases will require a tenant to seek the landlord’s consent before an assignment of lease occurs.
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