27.7 V. Mergers

• Jurisdiction: New York

V. Mergers

Few courts have considered whether the merger of a corporate tenant violates a Basic Assignment Restriction.⁶⁷² The courts that have considered the question typically have treated these transactions as constituting transfers by operation of law, not voluntary assignments.⁶⁷³ As a result, such transfers do not violate Basic Assignment Restrictions.⁶⁷⁴ One New York court reasoned:

[T]he merger of the subsidiary corporation into its parent corporation did not constitute an assignment for purposes of violating the nonassignment covenant in the lease. The merger did not change the beneficial ownership, possession, or control of [the subsidiary’s] property or leasehold estate. Only [the subsidiary’s] corporate form was affected, not the corporate property. Therefore, no assignment or similar transfer of the lease occurred.⁶⁷⁵

Although most jurisdictions agree that Basic Assignment Restrictions do not prohibit mergers of corporate tenants, courts disagree over whether to classify the change of ownership of a leasehold estate through a merger as an actual assignment of the lease, or as a mere transfer by operation of law. The wording of the restriction in any particular lease (in the context of a particular state’s law) can become quite important. The wording of the merger closing documents also may play a role.

Under a strict construction of Basic Assignment Restrictions, courts would prohibit mergers only if mergers pass rights through assignments rather than through mere transfers by operation of law. This question of construction becomes quite important given that most modern Assignment Restrictions specifically prohibit assignments by operation of law. Most courts that have considered this question of construction answer it by saying that a prohibition on assignments by operation of law does prohibit mergers.⁶⁷⁶ For example, an Oregon court stated:

Although there is “meager authority” addressing the effect on a nonassignment clause of mergers by corporate tenants, where such clauses prohibit transfers “by operation of law,” such mergers are a breach of the nonassignment clause “if the effect is to transfer the lease to an entity other than that of the original tenant” even though no interest in property is impaired by the merger.⁶⁷⁷

Other courts, however, have held that mergers, although “transfers” by operation of law, are not “assignments” of any kind and therefore such clauses do not reach them.⁶⁷⁸ Given the hostility of most courts toward...