Direct Agreements (from Chapter Three)
Who is your tenant? Whenever preparing to sign a commercial lease for a development plot, the developer will typically offer to enter into an agreement for lease in the name of the main company. How many times have we seen this, only for a subsidiary to be substituted at the very last minute? Expect nothing different from a developer of an EV charging station. As EV technology is relatively new, even the “household name” operators are also relatively new companies. Keep an eye out as always for the substitution of a newly formed SPV, and ensure that you check the structure of the tenant’s group of companies – is the SPV actually a “group” company at all? Be alert for this and advise your landlord client as to the risk that the SPV could be wound up and dissolved, leaving the site half built. Perhaps the developer can be persuaded to offer a parent company guarantee? It goes without saying that a guarantee is only as strong as the company which is giving it, and frequently a “parent” company will have no available cash at all, which makes enforcement of a guarantee extremely difficult.
In a large development, the developer tenant might be persuaded to give a security bond, provided by a bank or insurance company. However, be alert to the fact that such bonds are easily offered, but then seem to be the last piece of the jigsaw to be settled, leaving the conveyancer with very little time to give thorough consideration to the wording of the document.
Increasingly, as well as granting the lease, the landlord will be required by the tenant to enter into a further document with the tenant’s funder. The purpose of this additional document is to enable the funder to step into the lease as if it had been the original tenant. This document is known as a “direct agreement”. We are used to seeing such documents in complicated development agreements, and particularly in the construction collateral warranties which support them, but they are much less common in simpler landlord and tenant agreements. The tenant will explain that it can only proceed with the scheme if it obtains institutional funding, and that the funder insists that the landlord agrees to sign a direct agreement.
The landlord may well have devoted much time and energy investigating the covenant strength of its proposed tenant, only to find that it is now required to accept an as yet unspecified funding institution as its tenant for the remainder of the lease term. To make matters worse, the funder will commonly insist on the right to require a novation of the lease to its nominee!
Direct agreements are becoming increasingly common. Landlords should anticipate seeing a requirement for such a document in all of the leases described in this book. As for the drafting the lease might contain the following:
“Direct Agreement”: an agreement between the Landlord, the Tenant and any Funder taking a charge or mortgage over the Property in such form as that Funder requires and which gives the Funder a right to step into or be assigned the Lease, in such form approved by the Landlord (approval not to be unreasonably withheld or delayed and having due regard to the Funder’s requirements).
“The Landlord will co-operate in good faith with the Tenant and use all reasonable endeavours to satisfy the reasonable requirements of any Funder in respect of such financing or refinancing without any additional payment being made by the Tenant (except payment of the Landlord’s reasonable costs).”
“The Landlord shall use all reasonable endeavours without undue delay to agree the wording of and enter into a Direct Agreement with any such Funder, the Tenant and any other relevant party in respect of this Lease.”
The direct agreement itself might be a little unnerving to a landlord and tenant solicitor, as it is likely to have been drafted by the banking department of a City law firm and may be almost as long and complicated as the lease itself. The principle is simple enough – the tenant’s funder requires the landlord to accept the funder’s nominee as the new tenant. The direct agreement typically gives the funder the right to step into the lease, and then to step back out again. At that stage, the funder can require the landlord to accept a novation of the lease rather than an assignment. As with a standard assignment, either all parties sign a single deed, or the funder’s nominee sends a certificate to the landlord giving notice of the transfer and requesting that the landlord countersigns by way of acceptance. If you are acting for the landlord, please take care to ensure that the tenant does not have the right to vary the lease when any assignment or novation takes place – the direct agreement should give the tenant the right to pass the lease to its funder, but not to re-write the document.
Boiling down a twenty-page document to just a few lines, the fundamental clauses of the direct agreement might follow the following form:
Assignment
Pursuant to the terms of its debenture, the Tenant gives notice to the Landlord that it has assigned its rights under this lease to the Funder (“Assignment”). Notwithstanding the Assignment, the Tenant will remain liable under the Lease to perform all the obligations assumed by it under the Lease until such time as the Funder notifies the Landlord that the security created under its debenture has become enforceable, it will, subject to the provisions of this deed, remain entitled to exercise all of its rights, powers and discretions under the Lease.
The Landlord acknowledges receipt of the notice of the Assignment and confirms that it has not received notice of any other assignment and consents to the making of the Assignment.
Suspension
The Landlord undertakes that it shall not take any enforcement action without first delivering written notice of intention to take such action (“Termination Notice”) to the Funder specifying the grounds for such enforcement action.
Following the delivery of a Termination Notice, the Landlord undertakes that it shall not take any enforcement action during the period of 40 days following the date of such Termination Notice (the “Required Period”).
If, during the Required Period, the Funder delivers a Proposed Novation Notice to the Landlord, then the Required Period will be extended until the Replacement Tenant becomes a party to the Lease.
During the Required Period, the Landlord undertakes to comply with all of its obligations under the Lease in accordance with its terms.
Step-in and Step-out
The Funder may deliver a Step-in Notice to the Landlord during the Required Period. On the expiry of 5 business days after the date of such notice, the Funder shall become a party to the Lease with all of the rights of the Tenant under that agreement. The Funder shall be jointly and severally liable with the Tenant for all of its obligations under the Lease. The Funder shall on the expiry of 5 business days after the Landlord has received written notice from the Funder be released from any obligations to the Landlord arising under or in connection with the Lease and this deed and the rights of the Funder as tenant shall cease, subject to any arrears or liabilities existing at that date.
Novation
At any time during the Required Period the Funder may give notice of novation (“Novation Notice”) to the Landlord.
After it has served a Novation Notice, the Funder shall, to the extent it is available to the Funder, supply such further information relating to the Replacement Tenant as the Landlord may reasonably request.
If the Landlord does not approve a proposed Replacement Tenant, the Landlord shall notify the Funder in writing within 5 business days after the delivery of the Novation Notice setting out the reasons for its objection.
The Tenant and the Landlord shall each be released from further obligations to the other under the Lease and their respective rights against each other shall be cancelled.
The Landlord and the Replacement Tenant shall each assume obligations towards each other and acquire rights against each other in the same terms as the Lease.
The Landlord undertakes that it will perform its obligations under the Lease for the benefit of the Replacement Tenant instead of the Tenant.
The Replacement Tenant shall make payment in full of all arrears and shall assume performance of all the obligations and liabilities of the Tenant under the Lease.
The Landlord shall permit the charging of the Lease in favour of any bank or other funder providing finance to the Replacement Tenant.
For the avoidance of doubt, the Landlord agrees that such transfer shall not of itself give rise to any right to terminate the Lease.
New Direct Agreement
The Landlord and the Tenant or Replacement Tenant shall, at the request of the Funder, enter into an agreement on substantially the same terms as this deed following any refinancing or any novation of the Lease.
Transfer certificate
The Replacement Tenant accepts and procures the transfer to it of all of the rights, title and interest of and all of the obligations of the Tenant under the Lease.
The Replacement Tenant requests the Landlord to accept this transfer certificate as being delivered to the Landlord pursuant to, and for the purposes of the Direct Agreement so as to take effect in accordance with the terms of the Direct Agreement on the Effective Date.
The Replacement Tenant warrants that is has received a copy of the Lease, together with such other information as it has required in connection with this transaction and that it has not relied and will not rely on the Funder in relation to its entering into this transfer.
The Replacement Tenant undertakes to the Landlord that it will perform in accordance with the terms of the Lease all obligations of the Tenant under the Lease which it is assuming under the Direct Agreement.