Expanding Retailers Purchase Multiple Leases

Review the Leases

Whether looking to purchase a single or several stores, the first order of business is to review the leases. Most sellers will require that the prospective purchaser execute a confidentiality agreement requiring the prospective purchaser to keep the information confidential. A seller with operating stores will need to keep the potential sale close to the vest in order to avoid employees hearing of the possible sale and possible loss of employment. Once employees hear of a pending sale, they begin to look for jobs elsewhere, and once new jobs are secured, they jump ship. The seller will be attempting to keep its business operation fully functional until it has inked a hard and fast deal with a prospective purchaser.

Establish an Offering Price

Once a confidentiality agreement is signed, the purchaser should request enough information in connection with the leases and other assets so that an offering price may be established by the purchaser. The preliminary information will have to be verified during the contract due-diligence period (after an asset purchase agreement is executed). Most sellers of a substantial number of stores will have applicable lease and other asset information necessary to evaluate the assets in an electronic data room. A prospective purchaser should expect to see, at a minimum, the following information in the data room:

• Summary of lease information, including term, options, rent, percentage rent, CAM (common area maintenance cost) and tax costs. (The actual lease to confirm the summary may or may not be made available with the preliminary information. Often, a seller may want to hold the leases and more detailed information until a definitive asset purchase agreement is executed.)
• Any financial obligation payments that may be a part of the leases need to be evaluated before a value is determined for each lease.
• The use allowed, operating covenants, if any, trade-name restrictions, radius restrictions and any others that the lease puts on the lessee must be evaluated and discussed with your client.
• Assignment and subletting rights must be vetted to ensure the transfer may take place without any other third-party consent.
• Alteration rights and signage rights should also be reviewed to ensure that the purchasing retailer may use its trade name, install necessary signage and make alterations to the premises that will allow the purchaser's normal operations.
• Any subordination and non-disturbance agreement provided in the initial due diligence package prepared by the seller should be read to make sure that the purchaser obtains the benefit of any non-disturbance agreement from any and all lenders with a property lien that has priority over the leasehold interest.
• Environmental reports that may have been prepared at any time in the past should be made available for review.
• A preliminary inspection of the assets, including, but not limited to, the trade fixtures and equipment should be undertaken so that the prospective purchaser may determine a purchaser's price to be inserted into a draft asset purchase agreement.

The initial review by the legal team should be summarized for your client with all financial obligations spelled out, term and options set forth and any restriction that may impact the use or operation of the property clearly summarized.

A meeting should then be arranged with the business team to review the data, determine a purchase price, assets to be purchased and additional due diligence items that may be needed in order to determine a purchase price. It makes sense at this stage of the process to draft a letter of intent (“LOI”) addressing the basic business terms including, at a minimum, a purchase price, leases and other assets to be conveyed, along with a due-diligence period and target closing date.

Once the LOI has been executed, the legal team should commence a draft of an asset purchase agreement (“APA”) for internal review so that necessary details needed to consummate a purchase may be added to the basic business deal set out in the LOI.

A list of items that you may want to cover in an APA may look like the table of contents attached hereto as “Schedule A” (below).

More or less detail may be used, depending on the needs of the particular deal. The scope of this article does not allow a thorough discussion of each item listed in the sample table of contents, but it highlights a few items below that may not come up in a simple standard purchase of a single lease assignment.

Things to Remember

Include due-diligence conditions in detail when drafting the APA. It is common for a seller to withhold the entire package of due-diligence materials until after an APA is signed, so expect another burst of due-diligence work at that time. Leave time and draft conditions that will allow the purchaser to seek additional information from the seller, and allow for inspections of all equipment such as heating and cooling systems, trade fixtures and the like. You will also need title commitments for each lease location, as well as a right to inspect the property, including invasive environmental testing. A title defect or an environmental problem at one location may drastically impact the purchase price or the entire transaction.

Often, the detailed list of assets to be conveyed will need to be finalized during the due-diligence period. From a practical point of view, it may be hard to secure a list of the included assets from the seller, as many may not have that list readily available. At a minimum, a seller should be able to provide an asset list from its tax/accounting department to serve as a base for the physical walk-through and final determination of all assets to be conveyed.

If a party happens to be purchasing assets from a competitor, the purchaser may have interest in the inventory. Make sure to provide detail on the pricing and how the final count of merchandise to be transferred shall be determined. It is wise to hire a third-party “inventory-taker” to work with both purchaser and seller to determine the final count of the remaining inventory being transferred. Damaged, out-of-date, out-of-season and seller-branded products will need to be excluded.

If the purchase is from a competitor, it may be important to require the seller to conduct its business up to a day or two prior to closing to keep the traffic in the store and also to keep the store employees (whom the purchaser may want to hire) working. Any closed period sends workers scrambling for other employment and customers to other stores.

Closing

At the closing, treat each location as it would be treated for a single-store assignment of lease. All the typical needs for a single store assignment apply for each location being purchased. It is generally beneficial for record keeping and future transfers to obtain a separate assignment document, separate bill of sale, separate title insurance policy, separate title affidavit, etc. for each location rather than a single all inclusive set of documents covering all locations.

Where third-party consents are required, make sure to provide a sufficient time period in the APA to obtain the required consent, and also provide that the parties will request the consents as soon as possible after the contract is signed, as the consents are generally one of the longest lead items encountered in a transaction. The necessary consents will vary by deal and site, but generally, you should anticipate the need for lender consents, REA party consents, municipal consents and/or permits and not to be forgotten: any antitrust consent that may impact the transaction.

When addressing antitrust consents, you may want to engage antitrust counsel at an early stage to determine if such issues are a concern and if a Hart-Scott-Rodino (HRS) pre-acquisition filing is required. If a filing is required and is not made, hefty penalties may be incurred.

If a filing is required, the notification is made to the Federal Trade Commission (FTC) and the Department of Justice (DOJ). There are statutory initial waiting periods after the filing to allow review and a determination as to antitrust concerns or a finding of no concerns. If there are no concerns, the statutory initial waiting periods may be ended early with the clearance to close the transaction; however, in planning the closing date, a full statutory period to receive a response should be used to set your closing date with accommodation for additional time to close if the agency conducting the HSR filing review requests additional information, an additional period of time to provide the requested information and additional review time for the agency review will be necessary. Of course if a determination is made that there are antitrust issues, lengthy periods of time may be needed to resolve the issues which may include, among other terms, dropping from the purchase some of the sites that were included in the initial APA.

Remember to include a provision that complies with state and local bulk transfer notifications and sales tax clearance, if applicable, to the transaction contemplated. If buying leaseholds in several states, local counsel may be needed to assist with the filings.

Last, a transaction to purchase leases from retailers that are actually operating in the premises may include an obligation to hire all or some of the employees at the location. Labor and employment counsel should
be consulted for this part of the transaction. If the seller's employees are covered under collective bargaining agreements, those agreements will need to be reviewed and approved as part of the due-diligence conditions in the APA. Purchaser may need discussions with the labor union(s) involved in order to assimilate these potential new employees into its work force.

In addition, your current HR team will want the opportunity to interview potential employees, review current number of employees, and current wages and benefits whether or not collective bargaining agreements are involved.

Conclusion

Even though your real estate retailer client may have negotiated lease transactions and be familiar with the majority of the common terms in an APA to acquire leasehold interests of other retailers, your client may not be aware of the time and effort required to conduct the due-diligence investigation, the manpower needed and length of time required to obtain all consents and permits and arrange for transfer of employees. Time is money and counseling your client as to the time and effort needed to conclude the transaction should be part of your counseling to your client.

There are many moving pieces to this type of transaction. At an early stage, bring in all the consultants needed and make sure your client has an understanding of the full scope of the due diligence, and the potential filings and approvals that may be needed to close a transaction to purchase multiple leases.

Schedule A

Sample Table of Contents

1. Agreement to Sell and Purchase:

1.1. Leases and appurtenances

1.2. Buildings, fixtures, improvements

1.3. REA interest

1.4. Merchandise and inventory

1.5. Supplies

1.6. Various records

1.7. Permits and licenses

2. Assets to be Excluded:

2.1. Third-party-owned equipment and fixtures

2.2. Signage

2.3. Logo items

2.4. IT equipment/software

2.5. Trade names

2.6. Accounts receivable/books and records

2.7. Trademarks

2.8. Tax credits

2.9. Offsite inventory

2.10. Damaged merchandise

2.11. Business records, procedure manuals,

competitive analysis, etc.

2.12. Any in-store license, sublease or similar

agreements

3. Closing Date:

4. Consideration

4.1. Purchase price ' leases

4.2. Purchase price ' inventory

4.3. Purchase price ' miscellaneous items

5. Possession Date:

5.1. Risk of loss

5.2. Conduct of seller's business pending closing

6. Determination of Inventory Purchase Price:

6.1. Inventory count procedure

6.2. Calculation of price

7. Payments/Delivery of Documents:

7.1. Payment

7.2. Payment prorations

7.3. Documents to be delivered at closing

7.3.1. Bill of sale

7.3.2. Assignment documents

7.3.3. Estoppel certificates

7.3.4. FIRPTA affidavit

7.3.5. Guaranties

7.3.5.1. Title affidavits

7.3.5.2. Title policies

8. Consents and Permits/Licenses:

8.1. Consents

8.1.1. Lenders

8.1.2. Landlords

8.1.3. Governmental/Antitrust/Hart-Scott-Rodino filing

8.1.4. REA parties

8.2. Permits

8.2.1. Zoning

8.2.2. REA

8.2.3. FTC

9. Prorations:

9.1. Personal property taxes

9.2. Real property taxes

9.3. Transfer taxes

9.4. Prepaid expenses/deposits

9.5. Percentage rent

9.6. Disputes

9.7. Sublease rents

9.8. CAM

9.9. Gift cards/certificates

10. Bulk Transfer Laws:

10.1. Federal

10.2. State

10.3 Local

10.4. Filing of returns or tax clearance application

10.5. Notice of potential government claims and resolution/escrow holdback

11. Representations and Warranties of the Parties:

11.1. Good standing

11.2. Corporate authority

11.3. Binding obligation

11.4. No pending litigation

12. Condition of Property at Closing

13. Title:

13.1. Title to personal property

13.2. Leasehold title

14. Environmental Matters:

14.1. Known conditions

14.2. Future discovered conditions

14.3. Representations and warranties

15. Financing

16. Labor Matters:

16.1. Representations as to collective bargaining agreements

16.2. Assumption of liabilities

16.3. Exclusion of liabilities

17. Employees:

17.1. Hiring/assumption of employees

17.2. Termination of employees

17.3. WARN Act/state acts/compliance

18. Indemnification:

18.1. By seller

18.2. By purchaser

18.3. Procedure for indemnification

18.4. Survival

19. Casualty

20. Confidentiality and Access to Premises

21. Conditions to Closing

22. Termination Rights/Default under the APA

23. Break-Up Fee

24. Notices

25. Assignability

26. Governing Law

27. Brokerage

28. Publicity

29. Miscellaneous

Steven J. Roberts, a member of this newsletter's Board of Editors, is a Real Estate Attorney and Vice President with Ahold USA, Inc. He can be reached at 617-770-6920 or via e-mail at [email protected].

Expanding retailers are taking a hard look at assets being peddled by downsizing retailers. Commercial real estate developers have taken a breather in developing new shopping centers during the down economy, thereby limiting opportunities for expanding retailers to acquire new stores. However, the lack of new shopping center space coming to market has not stopped certain retailers from growing. Because several retailers have filed for bankruptcy and others have started to consolidate operations by closing stores and concentrating on their core markets, there is an opportunity for the purchase of closed stores by retailers looking to expand.

Attorneys Must Be Ready

With many opportunities in the marketplace to purchase real estate leases and other assets associated therewith, attorneys need to make sure they are ready to deal with a request from a client to purchase leases. A great deal of time and energy needs to be spent in due diligence on the leases and the assets under consideration to be purchased, and this may take a lot of manpower, depending on the number of leases to be purchased. Also, leases are purchased, assets such as leasehold improvements, trade fixtures and furnishings are often part of the deal. When looking to value the assets for sale, the primary value is in the real estate leases, with the secondary value being the other associated assets.

Review the Leases

Whether looking to purchase a single or several stores, the first order of business is to review the leases. Most sellers will require that the prospective purchaser execute a confidentiality agreement requiring the prospective purchaser to keep the information confidential. A seller with operating stores will need to keep the potential sale close to the vest in order to avoid employees hearing of the possible sale and possible loss of employment. Once employees hear of a pending sale, they begin to look for jobs elsewhere, and once new jobs are secured, they jump ship. The seller will be attempting to keep its business operation fully functional until it has inked a hard and fast deal with a prospective purchaser.

Establish an Offering Price

Once a confidentiality agreement is signed, the purchaser should request enough information in connection with the leases and other assets so that an offering price may be established by the purchaser. The preliminary information will have to be verified during the contract due-diligence period (after an asset purchase agreement is executed). Most sellers of a substantial number of stores will have applicable lease and other asset information necessary to evaluate the assets in an electronic data room. A prospective purchaser should expect to see, at a minimum, the following information in the data room:

• Summary of lease information, including term, options, rent, percentage rent, CAM (common area maintenance cost) and tax costs. (The actual lease to confirm the summary may or may not be made available with the preliminary information. Often, a seller may want to hold the leases and more detailed information until a definitive asset purchase agreement is executed.)
• Any financial obligation payments that may be a part of the leases need to be evaluated before a value is determined for each lease.
• The use allowed, operating covenants, if any, trade-name restrictions, radius restrictions and any others that the lease puts on the lessee must be evaluated and discussed with your client.
• Assignment and subletting rights must be vetted to ensure the transfer may take place without any other third-party consent.
• Alteration rights and signage rights should also be reviewed to ensure that the purchasing retailer may use its trade name, install necessary signage and make alterations to the premises that will allow the purchaser's normal operations.
• Any subordination and non-disturbance agreement provided in the initial due diligence package prepared by the seller should be read to make sure that the purchaser obtains the benefit of any non-disturbance agreement from any and all lenders with a property lien that has priority over the leasehold interest.
• Environmental reports that may have been prepared at any time in the past should be made available for review.
• A preliminary inspection of the assets, including, but not limited to, the trade fixtures and equipment should be undertaken so that the prospective purchaser may determine a purchaser's price to be inserted into a draft asset purchase agreement.

The initial review by the legal team should be summarized for your client with all financial obligations spelled out, term and options set forth and any restriction that may impact the use or operation of the property clearly summarized.

A meeting should then be arranged with the business team to review the data, determine a purchase price, assets to be purchased and additional due diligence items that may be needed in order to determine a purchase price. It makes sense at this stage of the process to draft a letter of intent (“LOI”) addressing the basic business terms including, at a minimum, a purchase price, leases and other assets to be conveyed, along with a due-diligence period and target closing date.

Once the LOI has been executed, the legal team should commence a draft of an asset purchase agreement (“APA”) for internal review so that necessary details needed to consummate a purchase may be added to the basic business deal set out in the LOI.

A list of items that you may want to cover in an APA may look like the table of contents attached hereto as “Schedule A” (below).

More or less detail may be used, depending on the needs of the particular deal. The scope of this article does not allow a thorough discussion of each item listed in the sample table of contents, but it highlights a few items below that may not come up in a simple standard purchase of a single lease assignment.

Things to Remember

Include due-diligence conditions in detail when drafting the APA. It is common for a seller to withhold the entire package of due-diligence materials until after an APA is signed, so expect another burst of due-diligence work at that time. Leave time and draft conditions that will allow the purchaser to seek additional information from the seller, and allow for inspections of all equipment such as heating and cooling systems, trade fixtures and the like. You will also need title commitments for each lease location, as well as a right to inspect the property, including invasive environmental testing. A title defect or an environmental problem at one location may drastically impact the purchase price or the entire transaction.

Often, the detailed list of assets to be conveyed will need to be finalized during the due-diligence period. From a practical point of view, it may be hard to secure a list of the included assets from the seller, as many may not have that list readily available. At a minimum, a seller should be able to provide an asset list from its tax/accounting department to serve as a base for the physical walk-through and final determination of all assets to be conveyed.

If a party happens to be purchasing assets from a competitor, the purchaser may have interest in the inventory. Make sure to provide detail on the pricing and how the final count of merchandise to be transferred shall be determined. It is wise to hire a third-party “inventory-taker” to work with both purchaser and seller to determine the final count of the remaining inventory being transferred. Damaged, out-of-date, out-of-season and seller-branded products will need to be excluded.

If the purchase is from a competitor, it may be important to require the seller to conduct its business up to a day or two prior to closing to keep the traffic in the store and also to keep the store employees (whom the purchaser may want to hire) working. Any closed period sends workers scrambling for other employment and customers to other stores.

Closing

At the closing, treat each location as it would be treated for a single-store assignment of lease. All the typical needs for a single store assignment apply for each location being purchased. It is generally beneficial for record keeping and future transfers to obtain a separate assignment document, separate bill of sale, separate title insurance policy, separate title affidavit, etc. for each location rather than a single all inclusive set of documents covering all locations.

Where third-party consents are required, make sure to provide a sufficient time period in the APA to obtain the required consent, and also provide that the parties will request the consents as soon as possible after the contract is signed, as the consents are generally one of the longest lead items encountered in a transaction. The necessary consents will vary by deal and site, but generally, you should anticipate the need for lender consents, REA party consents, municipal consents and/or permits and not to be forgotten: any antitrust consent that may impact the transaction.

When addressing antitrust consents, you may want to engage antitrust counsel at an early stage to determine if such issues are a concern and if a Hart-Scott-Rodino (HRS) pre-acquisition filing is required. If a filing is required and is not made, hefty penalties may be incurred.

If a filing is required, the notification is made to the Federal Trade Commission (FTC) and the Department of Justice (DOJ). There are statutory initial waiting periods after the filing to allow review and a determination as to antitrust concerns or a finding of no concerns. If there are no concerns, the statutory initial waiting periods may be ended early with the clearance to close the transaction; however, in planning the closing date, a full statutory period to receive a response should be used to set your closing date with accommodation for additional time to close if the agency conducting the HSR filing review requests additional information, an additional period of time to provide the requested information and additional review time for the agency review will be necessary. Of course if a determination is made that there are antitrust issues, lengthy periods of time may be needed to resolve the issues which may include, among other terms, dropping from the purchase some of the sites that were included in the initial APA.

Remember to include a provision that complies with state and local bulk transfer notifications and sales tax clearance, if applicable, to the transaction contemplated. If buying leaseholds in several states, local counsel may be needed to assist with the filings.

Last, a transaction to purchase leases from retailers that are actually operating in the premises may include an obligation to hire all or some of the employees at the location. Labor and employment counsel should
be consulted for this part of the transaction. If the seller's employees are covered under collective bargaining agreements, those agreements will need to be reviewed and approved as part of the due-diligence conditions in the APA. Purchaser may need discussions with the labor union(s) involved in order to assimilate these potential new employees into its work force.

In addition, your current HR team will want the opportunity to interview potential employees, review current number of employees, and current wages and benefits whether or not collective bargaining agreements are involved.

Conclusion

Even though your real estate retailer client may have negotiated lease transactions and be familiar with the majority of the common terms in an APA to acquire leasehold interests of other retailers, your client may not be aware of the time and effort required to conduct the due-diligence investigation, the manpower needed and length of time required to obtain all consents and permits and arrange for transfer of employees. Time is money and counseling your client as to the time and effort needed to conclude the transaction should be part of your counseling to your client.

There are many moving pieces to this type of transaction. At an early stage, bring in all the consultants needed and make sure your client has an understanding of the full scope of the due diligence, and the potential filings and approvals that may be needed to close a transaction to purchase multiple leases.

Schedule A

Sample Table of Contents

1. Agreement to Sell and Purchase:

1.1. Leases and appurtenances

1.2. Buildings, fixtures, improvements

1.3. REA interest

1.4. Merchandise and inventory

1.5. Supplies

1.6. Various records

1.7. Permits and licenses

2. Assets to be Excluded:

2.1. Third-party-owned equipment and fixtures

2.2. Signage

2.3. Logo items

2.4. IT equipment/software

2.5. Trade names

2.6. Accounts receivable/books and records

2.7. Trademarks

2.8. Tax credits

2.9. Offsite inventory

2.10. Damaged merchandise

2.11. Business records, procedure manuals,

competitive analysis, etc.

2.12. Any in-store license, sublease or similar

agreements

3. Closing Date:

4. Consideration

4.1. Purchase price ' leases

4.2. Purchase price ' inventory

4.3. Purchase price ' miscellaneous items

5. Possession Date:

5.1. Risk of loss

5.2. Conduct of seller's business pending closing

6. Determination of Inventory Purchase Price:

6.1. Inventory count procedure

6.2. Calculation of price

7. Payments/Delivery of Documents:

7.1. Payment

7.2. Payment prorations

7.3. Documents to be delivered at closing

7.3.1. Bill of sale

7.3.2. Assignment documents

7.3.3. Estoppel certificates

7.3.4. FIRPTA affidavit

7.3.5. Guaranties

7.3.5.1. Title affidavits

7.3.5.2. Title policies

8. Consents and Permits/Licenses:

8.1. Consents

8.1.1. Lenders

8.1.2. Landlords

8.1.3. Governmental/Antitrust/Hart-Scott-Rodino filing

8.1.4. REA parties

8.2. Permits

8.2.1. Zoning

8.2.2. REA

8.2.3. FTC

9. Prorations:

9.1. Personal property taxes

9.2. Real property taxes

9.3. Transfer taxes

9.4. Prepaid expenses/deposits

9.5. Percentage rent

9.6. Disputes

9.7. Sublease rents

9.8. CAM

9.9. Gift cards/certificates

10. Bulk Transfer Laws:

10.1. Federal

10.2. State

10.3 Local

10.4. Filing of returns or tax clearance application

10.5. Notice of potential government claims and resolution/escrow holdback

11. Representations and Warranties of the Parties:

11.1. Good standing

11.2. Corporate authority

11.3. Binding obligation

11.4. No pending litigation

12. Condition of Property at Closing

13. Title:

13.1. Title to personal property

13.2. Leasehold title

14. Environmental Matters:

14.1. Known conditions

14.2. Future discovered conditions

14.3. Representations and warranties

15. Financing

16. Labor Matters:

16.1. Representations as to collective bargaining agreements

16.2. Assumption of liabilities

16.3. Exclusion of liabilities

17. Employees:

17.1. Hiring/assumption of employees

17.2. Termination of employees

17.3. WARN Act/state acts/compliance

18. Indemnification:

18.1. By seller

18.2. By purchaser

18.3. Procedure for indemnification

18.4. Survival

19. Casualty

20. Confidentiality and Access to Premises

21. Conditions to Closing

22. Termination Rights/Default under the APA

23. Break-Up Fee

24. Notices

25. Assignability

26. Governing Law

27. Brokerage

28. Publicity

29. Miscellaneous

Steven J. Roberts, a member of this newsletter's Board of Editors, is a Real Estate Attorney and Vice President with Ahold USA, Inc. He can be reached at 617-770-6920 or via e-mail at [email protected].