In a previous Deal Note® (166), we discussed the general concept of ‘Change of Control’ provisions in M&A in the middle market of the aerospace and defense industry. In this Deal Note®, we focus on ‘Change of Control’ provisions in real estate lease agreements.
For founder-owners preparing to sell, real estate can be a hidden friction point in due diligence, particularly when your company leases rather than owns its facilities. While leases are often viewed as routine, ‘Change of Control’ provisions in a lease agreement can materially impact both time and money in M&A transactions. A ‘Change of Control’ provision in a facility lease gives your landlord the right to approve or disapprove a change of ownership under the lease. The devil is in the details here. A landlord’s favorable provision gives the landlord the unrestricted right to terminate your lease upon a sale to any buyer. In such cases, as we have seen many times, landlords will often seek to extract money from you, or the buyer, before they will agree to the ‘Change of Control’. For example, they can demand upfront fees (often couched as ‘contract modification costs’) or higher rent going forward.
If there is a possibility that you might want to sell your middle market aerospace and defense company in the future, you should ensure that your facility leases do not have unrestricted ‘Change of Control’ provisions when you next renew them. You do not need to convince your landlord to remove this provision in its entirety. It is market and it is reasonable to agree that you will only sell to a buyer that has a credit rating/standing that is no less than yours. But you should not agree to an unrestricted provision that allows your landlord to terminate your lease upon the event of a sale, with no restrictions.
Have a great day!
Troy Medeiros
Vice President
