Consents of Owner and Other Third Parties in Commercial Transactions – Real Estate and Construction

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When a professional practice or business is sold, whether through the sale of shares or assets, the issue of third party consents must be considered. Generally, when a business enters into a contract with a third party, the contract will include a provision that the consent of that third party must be obtained before the sale or transfer of the business to a new owner. It may also be necessary to obtain consent in the event of a change of control of the target company. Selling a business without first obtaining the consent of a third party, when such consent is required, may result in the seller’s breach of the contract with the third party and may therefore be held liable for the damages resulting therefrom. As such, third party consent or approval, if necessary, must be obtained before any transaction involving the sale of the business can be completed.

In addition, the seller is often required to provide a specific statement and guarantee in the purchase contract that the assets or shares being sold are free from any third party claims. Without first confirming that such third party consents or approvals have been obtained or are not required, Seller would not be able to provide such representation and warranty with respect to the assets or shares.

An example of third party consent that may be required is that of a landlord when the professional practice or business is the lessee of a commercial lease.

Due diligence lease review

If the firm operates from leased premises, the lease may be one of the important assets of the sale. Therefore, it is imperative that the seller examines the lease to determine whether there are assignment rights and, if so, under what conditions.

The assignment clause in a commercial lease is often the result of extensive negotiations between landlord and tenant as they have competing interests.

The owner will want to exercise as much control as possible over decisions about who can occupy the space and will need to:

  • ensure that the tenant is financially able to pay the rent;
  • control what the premises are used for (especially if the rented premises are located in a multi-tenant space); and
  • ensure that the tenant does not create a legal nuisance for other tenants and neighbors.

The tenant will want as much flexibility as possible because:

  • professional practice may become too large for the space before the expiration of the term of the lease;
  • downsizing may be necessary as the practice may pay to rent additional space that it does not need; Where
  • the lease is a substantial asset if they wish to sell their practice.

Generally, a well negotiated lease will result in a balance of these interests. The tenant will have the right to transfer or assign the lease, but only with the consent of the landlord.

Share the sale

It is also important to determine whether the lease defines a change of control of the business as an assignment of the lease, subjecting it to the consent of the landlord.

When selling shares, the assets of the company are not legally transferred to the new owner. However, the shares of the company are sold and the company will undergo a change of control. The commercial lease will often include a restriction on the change of control of the tenant business that the consent of the landlord must be obtained in the event of a change of control of the tenant.

It is essential to review the wording of assignment and transfer clauses in leases to ensure that consent is obtained when required and that the transaction is not blocked as a result. Appropriate due diligence should be conducted as early as possible in the transaction process to determine whether third party consents or approvals are required and to avoid unnecessary delays.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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