Selling shares? You may need your landlord’s permission

An often-overlooked step when selling shares is the review of key contracts, such as the company’s lease agreement, to ascertain whether:

• the share sale may require the consent of the landlord, to avoid an unauthorised “assignment” of the lease by the company; and
• the seller and/or a related party have given a personal guarantee to the landlord for the company’s performance of the lease.

It is common for lease agreements to contain “change in control” clauses (including in the form of a deemed “assignment”) and personal guarantees. When selling shares in a company that leases property, there are several things to consider, including:

Landlord consent: Some leases require the landlord’s consent to transfer a majority or all the company’s shares. If there is such a requirement and consent is not obtained, the share transfer may amount to a breach the lease. This could trigger a right for the landlord to terminate the lease. Most leases will contain specific provisions around whether a share transfer is deemed to be an assignment of the lease and if so, the process to follow for requesting the landlord’s consent.

Change in control clauses: A lease may have a “change in control” clause separate to provisions relating to an assignment, that may require landlord’s consent prior to completion of a share transfer. Typically, such clauses will only be enlivened where the share transfer results in a new shareholder having control over the decision making of the company.

Guarantees: It is unlikely that a lease will include an express clause requiring the release of guarantors where those persons cease to be officeholders and/or shareholders of the tenant company, however it could be a condition of the landlord’s consent to an assignment or “change in control” that new officeholders and/or shareholders provide a personal guarantee.

What you should do

Prior to entering a contract to sell or transfer shares, you should review the company’s contracts to ensure that you are aware of any requirements to obtain consent from the other party. If the company leases premises, you should determine what consents, if any, you will need from the landlord.

This will ensure that there is no embarrassment in having to deal with consents retrospectively and avoid potential exposure to financial loss if the consents cannot be obtained after you have agreed to sell or transfer the shares.

Page Seager can assist you by:

• reviewing your lease agreement, to ensure that any change in control or assignment clauses are complied with;
• preparing an appropriate share sale agreement that deals with any consents required;
• pursuing the release of personal guarantees provided to the landlord; and
• dealing with your landlord to obtain their consent.