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Commercial Lease Diligence

By Jackie M. Burkhardt
February 28, 2015

In many acquisition and merger transactions, a component of the real estate holdings of the selling entity is leased commercial property. Counsel to a potential purchaser in an acquisition transaction, whether in the form of an asset purchase, stock or membership interest purchase, or merger, must be equipped to advise the client regarding the leased property both for negotiation of the purchase agreement and for the client's use of the property after the transaction has closed. This article reviews the recommended due diligence efforts of the purchaser's counsel with respect to leased commercial property, and elaborates on the pre- and post-closing rationales for completing such diligence review. The main focus of this article is the due diligence activities and rationale of counsel to a potential purchaser of all of the stock of a selling entity. Where relevant, it incorporates the alternate considerations that might arise in the context of an asset purchase or merger structure.

The Scope of the Transaction

Prior to an immersive review of the minutiae of each piece of leased commercial property, the attorney should engage in an efficient and high-level overview of the seller's real estate holdings in order to become comfortable with the scope and type of leased commercial property involved in the proposed transaction. In a stock purchase structure, the purchaser will take all assets and liabilities associated with each leased property (unless the parties negotiate for a termination of the lease prior to closing). Therefore, consideration of the purchaser's goals is relevant to counsel's diligence efforts. During initial discussions with the client, counsel should understand whether the purchaser needs the leased space for its operations if the transaction is consummated. The attorney's knowledge of the general use (manufacturing, office, raw land), location (and proximity to the client's current facilities), and the length of each lease (including any options to purchase) will aid the client in outlining its overall goals in the context of all of the seller's real property interests.

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