Does a Buyer Inherit All of a Seller's Liabilities?

One important part of any business transaction is negotiating the rights being acquired, and the liabilities being assumed, by the purchaser.  Naturally, a buyer wants to broaden the rights while narrowing liabilities.  Although this may be possible in a corporate asset purchase, it may be difficult to do in other deals, such as a real estate deal with lease and tenant obligations, as the Appeals Court ruled in September 2012.

The Appeals Court held that the buyer of a commercial building that was subject to an existing lease and tenant could not cherry-pick the obligations of the lease that it agreed to assume, particularly where the tenant had not consented to the arrangement.  Thus, even though the buyer had executed an "assignment and assumption agreement" with the seller/landlord that purported to limit the buyer's future obligations, the Court rejected that agreement as an improper, unilateral alteration of the lease.  The Court imposed all of the underlying lease obligations on the buyer as the new landlord.

The case was titled, Bright Horizons Children's Centers, Inc. v. Sturtevant, Inc.  Sturtevant had purchased a building that was subject to an existing lease with the Bright Horizons tenant.  The lease obligated Sturtevant' seller, as landlord, to construct a building for Bright Horizons by a certain date or pay a rental credit for late delivery. 

 

At the time Sturtevant purchased the property, the building was already far behind schedule.  After further delays, Bright Horizons finished the building and then sought its costs and the rental credit from Sturtevant.  Sturtevant claimed that it had signed an assignment and assumption agreement with the seller which absolved Sturtevant of any construction-related lease obligations owed to Bright Horizons. 

At trial, the judge agreed with Sturtevant's argument.  However, on appeal, the Appeals Court rejected it, holding that Sturtevant and the seller were not allowed to alter Bright Horizon's rights under the lease simply by conveying the property and entering into an assignment and assumption agreement. 

The Court cited "black-letter law" on these issues:  "A deed transfer of real property, subject to a leasehold estate, operates as a matter of law as an assignment of the lease", so that "a successor lessor, who takes by deed real property subject to a pre-existing valid lease, stands in the shoes of and has the same rights and duties under the lease as had been held by its predecessor." 

 

Also, "one party to a contract cannot alter or modify the rights or duties of a counterparty by unilateral action." 

Sturtevant was not able to use its assignment and assumption agreement to carve out obligations that were otherwise contained in the lease (e.g., construction and rental credit responsibilities), which obligations transferred to Sturtevant when it acquired the property.  One important lesson from this case is the value of thorough factual and legal due diligence for a buyer before closing on a transaction, to make sure the full scope of liabilities is known and addressed.

Although the Court rejected the assignment and assumption agreement in this context, it noted that a buyer could lawfully cherry-pick obligations and liabilities that it would agree to assume in a corporate asset purchase.  In an asset purchase, the buyer and seller can negotiate which assets and liabilities will be transferred to the buyer, and which ones will remain with the seller. 

 

In July 2012, I circulated a memo concerning asset and stock purchase deals and "10 Terms for Your Term Sheet".  Please contact me if you would like to obtain a copy of that memo.

Please contact me if you or a colleague have any questions regarding assignment and assumption agreements, asset or stock purchase agreements, or the purchase or sale of a business or real estate.