Landlord Blocking the Sale of Your Minnesota Business

When Does a Sale of Your Business Need the Landlord’s Consent?

A sale of your business needs the landlord’s consent when the lease requires consent for the kind of transfer the sale makes. An asset sale hands the lease itself to the buyer, which is an assignment, so the lease’s assignment clause applies. A sale of the company’s shares or membership interests leaves the company as the tenant, and consent then turns on whether the lease also treats a change in ownership as an assignment.

The company keeps its lease in an entity sale because it exists apart from its owners. Under Minnesota’s LLC statute, “A limited liability company is an entity distinct from its members” (Minn. Stat. § 322C.0104, subd. 1). When the members sell their interests, the LLC is still the tenant. A corporation whose shares are sold is in the same position, because the corporation, not its shareholders, signed the lease.

A lease can close that gap with a change-of-control clause, which treats a transfer of ownership or control of the tenant as an assignment needing consent. Some lease forms name only a corporation or a partnership in that clause, which leaves open whether a sale of an LLC is covered. A Minnesota court reads a lease to give effect to the parties’ intent. Where a term can reasonably be understood in two ways, the court may look outside the lease for what the parties meant (Medinvest Co. v. Methodist Hospital, 359 N.W.2d 714, 716 (Minn. Ct. App. 1984)). Some leases also let the landlord end the lease instead of consenting. I suggest reading the assignment, change-of-control, and default sections together before choosing between a stock sale vs asset sale, because the structure decides which clause applies. How these clauses work in contracts generally is covered in the anti-assignment clause.

What Consent Standard Does Your Lease Give the Landlord?

Your lease’s assignment clause sets the standard, and common forms include consent with no stated standard, consent that will not be unreasonably withheld, and consent in the landlord’s sole discretion. The first lets the landlord refuse a suitable buyer for no stated reason. The second requires a reasonable refusal once any conditions the clause attaches to consent are met, and whether a refusal is reasonable is usually a question of fact weighed against the lease’s purpose. The third is read by its own words.

The Minnesota Supreme Court has addressed a lease that requires the landlord’s written consent and says nothing more. It adopted the majority rule that the landlord “may arbitrarily refuse to accept a subtenant suitable and otherwise responsible” (Gruman v. Investors Diversified Services, Inc., 247 Minn. 502, 78 N.W.2d 377 (Minn. 1956)). The lease in Gruman barred the tenant from assigning or subletting “without the consent of Lessor in writing,” and the landlord refused a subtenant both sides agreed was suitable. The court ruled for the landlord in its suit for the rent after the tenant moved out. It added that a tenant wanting more protection could negotiate a clause that the landlord’s consent “should not be unreasonably withheld.”

A not-unreasonably-withheld clause limits the landlord, but conditions written into the clause come first. In Leonard, Street & Deinard v. Marquette Associates, 353 N.W.2d 198 (Minn. Ct. App. 1984), the lease allowed an assignment “with the written consent of the Lessor, which consent shall not be unreasonably withheld, provided” three conditions were met. The conditions included that “such assignment or sublease shall not relieve Lessee of any of its obligations under this lease” and that any profit from the assignment went to the landlord. Reversing a judgment for the tenants, the Court of Appeals explained the order of analysis: “The landlord’s duty to act reasonably does not arise until the three provisos of the sublet and assignment clause have been met.” It read the obligations condition to reach the lease’s use terms: “The restrictive use provision and the law library rider are obligations under the lease which must be assumed by any subtenant or assignee before the landlord is obligated to consent to the assignment of the lease.” The proposed assignee would not take on those use terms, so the landlord did not have to consent.

A sole-discretion clause was not before the court in any of these decisions. I suggest treating one as letting the landlord refuse unless the lease adds a standard elsewhere, because Gruman permits a refusal for no stated reason under a clause that sets no standard at all.

What Counts as a Reasonable Reason to Refuse a Buyer?

Whether a landlord’s reason is reasonable turns on the lease’s words and purpose and on the facts behind the refusal. The Minnesota Court of Appeals has upheld a refusal under a not-unreasonably-withheld clause where the subtenant would defeat the lease’s primary purpose. Its decision reads: “Since the primary purpose of the lease agreement would be defeated by allowing Damon Clinical Laboratories to sublet office space in the medical building, respondent reasonably refused to consent to the sublease” (Medinvest, 359 N.W.2d at 717). A landlord may also point to the buyer’s ability to pay the rent and run the business. That goes to the suitability of the tenant, which the Minnesota Supreme Court has described as a consent clause’s purpose.

In Medinvest, a hospital leased land next to the hospital for a medical office building at $1 a year plus taxes. The hospital refused a laboratory as a subtenant because it would compete with the hospital’s own laboratory. The court said: “It is obvious on the face of this lease, however, that the primary purpose is not rent.” It treated the word “unreasonable” in the lease as open to more than one reading, let the hospital offer evidence of what the lease was for, and accepted the trial court’s finding that “the primary purpose was to facilitate use of the hospital’s facilities.” It relied on out-of-state decisions that, in its words, “establish that when a proposed subtenancy would defeat a specific and primary purpose for a lease, albeit economic, the landlord may withhold consent.”

The Minnesota Supreme Court has described the purpose of a lease’s consent clause more narrowly. In a case about a mortgage lender’s consent, it said that “the purpose of an anti-assignment clause in a lease is to assure the suitability of the tenant for the protection of the landlord in his ownership and operation of his property,” and “not for his general economic protection” (Torgerson-Forstrom H.I. of Willmar, Inc. v. Olmsted Federal Savings & Loan Ass’n, 339 N.W.2d 901, 904 (Minn. 1983)). Medinvest later called that statement dicta, meaning a remark the court did not need to decide its case. The supreme court’s actual holding let the lenders condition their consent on an interest-rate increase the borrower conceded was reasonable. It also noted that reasonableness is almost always a question for whoever decides the facts.

Reasons a landlord may raise under a reasonableness clause include:

• The buyer’s financial strength and its ability to pay the rent for the rest of the term.
• The buyer’s experience running this kind of business.
• A planned use the lease’s use clause does not allow.
• A conflict with an exclusive-use right the landlord has given another tenant.
• A condition written into the consent clause that the buyer has not met.

Whether a landlord bound by a reasonableness clause may demand higher rent in exchange for consent turns on the lease’s words and purpose. Torgerson-Forstrom’s suitability statement supports the seller, while Medinvest upheld a refusal resting on the lease’s own economic purpose.

How Do the Lease’s Notice Rules Apply to a Text Message?

The lease’s notice clause decides whether a text message counts as notice of the sale. A clause requiring written notice by certified mail, courier, or hand delivery to a stated address gives the landlord an argument that a text fell short. Where the lease is silent on the method, whether a text counts turns on Minnesota’s electronic transactions act, which applies only when both sides agreed to deal electronically.

Minnesota’s Uniform Electronic Transactions Act helps only part of the way. It provides: “A record or signature may not be denied legal effect or enforceability solely because it is in electronic form” (Minn. Stat. § 325L.07). But “This chapter applies only to transactions between parties, each of which has agreed to conduct transactions by electronic means,” and that agreement “is determined from the context and surrounding circumstances, including the parties’ conduct” (Minn. Stat. § 325L.05). The same section adds: “Except as otherwise provided in this chapter, the effect of any of its provisions may be varied by agreement.” A lease’s notice clause is that kind of agreement.

The act also says when an electronic record is sent. “Unless otherwise agreed between the sender and the recipient, an electronic record is sent when it” is directed properly “to an information processing system that the recipient has designated or uses for the purpose of receiving electronic records or information of the type sent,” among other requirements (Minn. Stat. § 325L.15). Agreeing once does not commit a party to every later exchange, because the act “does not prohibit the party from refusing to conduct other transactions by electronic means” (Minn. Stat. § 325L.05).

The cure costs little. I suggest sending the notice again now, in exactly the form and to the address the lease requires, with the buyer’s name, the terms the lease asks for, and a request for consent. A correct notice ends the argument over the first one and starts any review period the lease gives the landlord.

What Can a Landlord Ask About Your Buyer, and How Should the Records Be Protected?

A landlord’s requests that bear on whether the buyer will pay the rent and run the business fit the purpose the Minnesota Supreme Court described for a consent clause, the suitability of the tenant. Those requests include financial statements, tax returns, a credit report, a business plan, the buyer’s experience, and a personal guaranty from the buyer’s owners. A lease may also list what the landlord may request.

Two Minnesota statutes bear on how those records are handled. A person or entity other than a government entity may not “require an individual to transmit the individual’s Social Security number over the Internet, unless the connection is secure or the Social Security number is encrypted,” and it “must restrict access to individual Social Security numbers it holds so that only its employees, agents, or contractors who require access to records containing the numbers in order to perform their job duties have access to the numbers” (Minn. Stat. § 325E.59, subd. 1). The same subdivision allows Social Security numbers in applications and forms sent by mail.

A person or business that conducts business in Minnesota and owns or licenses data that includes personal information must disclose a breach. The disclosure goes to any Minnesota resident “whose unencrypted personal information was, or is reasonably believed to have been, acquired by an unauthorized person” (Minn. Stat. § 325E.61, subd. 1). Personal information there means a person’s first name or first initial and last name together with any one or more of three data elements. They are a Social Security number, a driver’s license or Minnesota identification card number, or an account or card number with any required code or password that would permit access to the financial account. That definition applies only “when the data element is not secured by encryption or another method of technology that makes electronic data unreadable or unusable, or was secured and the encryption key, password, or other means necessary for reading or using the data was also acquired.”

I suggest these steps, because a landlord with no plan for the records exposes the buyer, and the buyer’s worry can stall the deal:

1. Sending the buyer’s records through a secure portal or as encrypted files, not as plain email attachments.
2. Holding back Social Security numbers until the landlord’s credit check actually needs them.
3. Asking the landlord to sign a short confidentiality letter limiting use of the records to deciding on the buyer and requiring deletion if the sale does not close.
4. Agreeing in writing on who pays any cost of the landlord’s review, which the lease may already set as a fee.

How Should the Purchase Agreement Handle Landlord Consent?

The purchase agreement should make the landlord’s written consent, or a signed new lease for the buyer, a condition of closing. That condition lets either side wait or walk away without breaching the purchase agreement if the landlord refuses, unless that side’s own conduct frustrated the condition. In a bond dispute, the Minnesota Supreme Court restated that “the party to a contract cannot take advantage of the failure of a condition precedent when the party itself has frustrated performance of that condition” (In re Hennepin County 1986 Recycling Bond Litigation, 540 N.W.2d 494, 502 (Minn. 1995)). It should also set a date to request consent, name who supplies each item the landlord asks for, and decide who pays any consent fee and the landlord’s attorney fees.

An outside date tells both sides when the deal ends if consent never comes, and an early request for consent gives the landlord time to decide. In Torgerson-Forstrom, an agreement to buy a hotel company’s shares was contingent on the consent of the company’s mortgage lenders. Four of the five lenders received their first notice three days before the scheduled closing. Three of them conditioned consent on a 2% interest-rate increase, and the buyer declined to go forward (339 N.W.2d at 902). For the full sequence of a sale, see selling a Minnesota business.

Consent alone may not end your own exposure on the lease. The lease in Leonard, Street & Deinard said that an assignment “shall not relieve Lessee of any of its obligations under this lease.” Unless the landlord signs a release, you, and any owner who signed a personal guaranty, can remain liable if the buyer defaults. I suggest asking for a release in the same signed consent, because the landlord is already deciding on the transfer and can address your continuing liability in one document. See your liability after assigning a lease and enforcing a commercial lease guaranty for the details.

What Are Your Options When the Landlord Refuses or Stalls?

When the landlord refuses or stalls, you have six main options. You can talk with the landlord, negotiate the terms of consent, restructure the sale, or help the buyer sign its own lease. You can also send a demand letter or ask a court to decide what the lease requires. Each fits a different situation and carries a different cost and risk.

While you choose, I suggest paying rent on time and keeping every other lease term. A default of your own gives the landlord a reason to refuse that has nothing to do with the buyer. I also suggest keeping each request and response in writing.

1. A direct conversation with the landlord. A meeting between you, the buyer, and the landlord fits when the objection may rest on missing information or an unspoken concern. It costs an afternoon. I suggest asking what the landlord needs to approve the buyer and bringing the buyer’s package. A concern that a larger deposit or a guaranty would answer is easier to resolve in person than by letter.
2. Negotiated terms of consent. The buyer can offer a larger security deposit, a personal guaranty from its owners, or proof of experience, and you can offer to stay on as a guarantor for a set period. If the landlord asks for a fee or a rent change, the lease’s consent standard decides how much room the landlord has to insist. I suggest putting any agreed terms in a signed consent, because a spoken approval may be disputed later.
3. A restructured sale. Selling the company instead of its assets can avoid an assignment when the lease has no change-of-control clause covering your entity. The buyer then takes the company with all of its history and liabilities. The sale may also need the owners’ approval under the company’s governing documents; the approvals an LLC or corporation needs to sell covers them. I suggest not using an entity sale to get around a clause that covers it, because closing a transfer the lease prohibits can put the lease in default.
4. A new lease for the buyer. The landlord and the buyer can sign a new lease while yours ends by written agreement, which can also end your liability. Under Minnesota’s statute of frauds, a lease for longer than one year is void unless it, or a note or memorandum of it stating the consideration, is “in writing and subscribed by the party by whom the lease or sale is to be made, or by the party’s lawful agent thereunto authorized in writing” (Minn. Stat. § 513.05). A spoken promise from the landlord is not enough for a lease longer than one year. If the landlord instead offers the buyer different space, whether to take it is a business decision for the buyer.
5. A demand letter. A letter quotes the consent clause, shows each condition is met, and sets a date for a decision. It fits when the lease has a reasonableness clause, its written conditions are met, and the landlord has given no reason for refusing. It costs little, but it can harden the landlord’s position, so I suggest sending it after the conversation, not instead of it.
6. A lawsuit. Under Minnesota’s declaratory judgments act, “Courts of record within their respective jurisdictions shall have power to declare rights, status, and other legal relations whether or not further relief is or could be claimed” (Minn. Stat. § 555.01). A party to a written contract “may have determined any question of construction or validity arising under the instrument” (Minn. Stat. § 555.02). The tenants in Leonard, Street & Deinard sought that kind of declaration that their landlord could not refuse consent, and the dispute in Medinvest ended in one. A suit takes time a buyer may not wait for, and its outcome depends on the lease’s words and the facts behind the refusal.

Getting the Lease Out of the Way of Your Sale

A landlord’s power over the sale of your Minnesota business comes from your lease. I suggest reading the consent standard, any change-of-control clause, and the notice clause before you sign a purchase agreement, because they decide what the landlord may do. Notice in the form the lease requires starts any review period the lease gives the landlord. A closing condition for consent lets either side wait or walk away without breaching the purchase agreement, unless its own conduct frustrated the condition. If the landlord still refuses, the options run from a conversation to a court declaration, and the lease’s words decide which is worth pursuing. For how the rest of a sale unfolds, see my Minnesota business sales practice.

If your landlord is refusing or delaying consent to your sale, email [email protected] with a brief description, and I can start an intake and conflict check before you send any confidential documents.