The lease said the seller was not responsible for the lease if assigned to an assignee (the buyer in this case) who had a net worth of $20 million or more at the time of assignment.
M&A Stories
May 31, 2023
Introduction:
When purchasing the assets of a restaurant or supermarket chain, leased buildings are often involved, necessitating lease assignments. In this blog post, we discuss a recent case where the responsibility for a lease was disputed between a seller and a landlord.
Background:
In 2008, a private equity buyer acquired the assets of 225 Romano’s Macaroni Grill restaurants. One of these restaurants had a lease that allowed assignment, relieving the tenant (the seller) from any further lease obligations if the assignee (the buyer) had a net worth of $20 million or more.
Lawsuit:
Subsequently, the buyer ceased rent payments on the leased property, prompting the landlord to sue the seller, arguing that the seller remained responsible for the lease. The key issue centered around the buyer’s net worth at the time of the assignment.
The seller presented a balance sheet, prepared for post-closing adjustments to the purchase price, showing the buyer’s net worth as $31 million on the assignment date. However, the landlord’s accounting expert contested the calculation, raising technical objections based on the transaction structure, sale/leaseback financing, and a private equity rollover. The expert claimed that the net worth calculation did not adhere to Generally Accepted Accounting Principles (GAAP) and lacked certification by the buyer or an independent certified public accounting firm. The landlord’s expert testified that the buyer’s net worth on the closing date was only $10 million.
The court observed that the lease assignment provision did not require GAAP compliance or certification by the buyer or an independent accounting firm. Additionally, the court found the landlord’s expert’s technical arguments unconvincing, as they reduced the buyer’s net worth by more than $11 million, putting it below the $20 million threshold.
Outcome:
Consequently, the court ruled in favor of the seller, absolving them of responsibility for the lease. Furthermore, the court ordered the landlord to cover the seller’s reasonable legal costs and fees.
Case Reference:
See Brandywine Development Group, LLC v. Brinker Restaurant Corporation, C.A. No. N17C-08-059 MMJ., Superior Court of Delaware (Submitted: February 9, 2023. Decided: May 16, 2023)
Comment: In hindsight, it would have been beneficial for the seller to have obtained a reviewed balance sheet, which involves examination and analysis by a certified public accountant or an independent auditor. However, the cost would certainly be a factor.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
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Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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