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NTH250E, L.L.C. v. Global Toys Acquisition LLC

A-1999-09T3 (N.J. Super. App. Div. 2011) (Unpublished)

LEASES; ASSIGNMENTS — Where a lease does not expressly call for money to be paid to the landlord upon the reorganization of a tenant’s parent company and where the parent company remains the owner of the tenant after the reorganization, no assignment fee will be payable to the landlord even if the fee would otherwise be payable upon assignment of the lease because, among other things, the tenant receives no consideration from the reorganization of its parent company.

A sublease had an assignment clause that permitted the tenant to assign it without the sublandlord’s consent, but required the tenant, as additional rent, to pay a portion of any consideration received for the assignment. The sublease also provided that a dissolution, merger, consolidation, reorganization or change of controlling interest was deemed to be an assignment that would trigger the requirement to pay the assignment fee. However, the sublease contained a safe harbor provision. The assignment fee was not required in the event of an assignment by the tenant to a parent company, affiliate or wholly-owned subsidiary.

The sublandlord claimed that a leveraged buyout of the subtenant’s parent company resulted in an assignment of the sublease and this entitled the sublandlord to the assignment fee. The subtenant argued that the privatization of its parent company did not constitute an assignment of the subtenant’s interest, and therefore no payment was required. The lower court granted the subtenant’s motion for summary judgment, thereby dismissing the complaint. The sublandlord appealed, but the Appellate Division affirmed.

According to the lower court, the leveraged buyout and privatization of the subtenant’s parent company was not an assignment of the sublease since there was no assignment of the subtenant’s interest to a third-party in exchange for specific consideration. It noted that, after the privatization, the subtenant under the sublease was the same as before and there was no consideration paid for the sublease. Even though $6.6 billion was paid as part of the overall transaction, none of it was specifically paid as consideration for an assignment of the sublease. Therefore, the sublandlord was not entitled to the fee pursuant to the sublease’s assignment clause.

In the appeal that followed, the Appellate Division agreed, rejecting the sublandlord’s claim that the overall transaction had resulted in a change in ownership or restructuring of the subtenant’s parent company that caused change in beneficial ownership of the subtenant and this triggered the payment requirement. The Court rejected the sublandlord’s reliance on a tax memorandum prepared by the parent company’s accountants. The sublandlord was seeking to use the memorandum to prove that the reorganization required the additional rent payment. The Court noted that the lease, not the tax accountant’s memorandum, was dispositive in determining if an assignment had taken place. The Court found that the lease clearly intended that the sublandlord would only share in consideration received by the subtenant for an assignment to a third-party, but that no fee was required in connection with the assignment of the lease to a closely-related entity. Further, the Court found that the leveraged buyout of the parent company did not constitute a reorganization of the subtenant because the parent company was the 100% owner of the subtenant-subsidiary both before and after the buyout. It noted that a change in ownership of a parent was not the same as a reorganization of a subsidiary. The Court also rejected the sublandlord’s argument that the safe harbor provision in the lease (which allowed assignments to parents, subsidiaries or affiliated entities without payment of the assignment fee) did not apply because the reorganization used these as steps in an integrated transaction designed to transfer all of the assets of the parent company and its subsidiaries to private investors. The Court noted that the “step-doctrine,” something the sublandlord sought to invoke, while used by tax authorities to assess the tax consequences of complicated transactions did not govern the interpretation of the lease. The plain language of the lease did not require an assignment fee in the case of an assignment to parents, affiliates or subsidiaries. Since that’s what took place in this case, no assignment fee was due.

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