The National Law Forum

Using an LLC to Protect the Family Vacation Home

Vacation homes offer a retreat from daily life, providing a sanctuary to relax and create cherished family memories. Many owners envision passing down their vacation home for future generations to enjoy, but the lack of proper planning can often lead to intra-family disputes. Leaving a vacation home outright to children or other family members may be the easiest option, but the potential for discord over the control and usage of the property only increases as ownership is passed from one generation to the next. A limited liability company (LLC) can mitigate the risk of conflict and provide a tailored solution to the meet the specific needs of a family.

When a vacation home is owned by an LLC, the membership interests in the LLC are passed down to younger generations, which allows for the continued use and enjoyment of the property by the family. The structure also provides a framework for management through an operating agreement, which governs the LLC. An operating agreement allows the original owner to create a plan for how the property will be used and managed as additional owners are added. The agreement can determine who is responsible for property management, how expenses should be proportioned and paid, how decisions should be made and provide guidelines for scheduling family usage. By establishing clear rules and procedures, an LLC can reduce the likelihood of disputes and encourage fairness among different generations.

Another benefit of an LLC is the ability to prevent unwanted transfers of ownership thus ensuring that the property stays in the family. A well-drafted operating agreement can prohibit membership interests from being transferred to third parties, protecting the family as a whole from an individual’s divorce or creditor problems. The LLC can also hold additional assets, including rental income and deposits of other funds earmarked for property expenditures, which facilitates the proper management and use of resources to cover expenses.

An LLC offers an efficient structure to avoid intra-family turmoil and preserves the spirit of the family vacation home for generations to come.

Curb Your Pollution: EPA Issues Final Rule to Reduce Toxic Air Pollution

EPA Issues Final Rule to Reduce Toxic Air Pollution from the Synthetic Organic Chemical Manufacturing Industry and the Polymers and Resins Industries

On April 9, 2024, the U.S. Environmental Protection Agency (EPA) announced its final rule that is touted to provide critical health protections to hundreds of thousands of people living near chemical plants. The final rule, signed March 28, 2024, will reduce emissions of hazardous air pollutants, including the toxic chemicals chloroprene and ethylene oxide (EtO). The rule implements sections 111 and 112 of the Clean Air Act.

When fully implemented, the final rule will reduce more than 6,200 tons a year of over 100 air toxics – including EtO and chloroprene – from covered equipment and processes at plants in Texas and Louisiana, along with plants in other parts of the country including Delaware, New Jersey, and the Ohio River Valley.

As part of the final rule, the EPA is also issuing new emissions limits for dioxins and furans. This will reduce more than 23,000 tons of smog-forming volatile organic compounds (VOCs) each year.

EPA’s final rule will also require plants to conduct fenceline monitoring if any of the equipment or processes covered by the rule use, produce, store, or emit EtO, chloroprene, benzene, 1,3- butadiene, ethylene dichloride or vinyl chloride. Fenceline monitoring is used to measure levels of pollution in the air around the perimeter of a facility. The fenceline monitoring provisions of the rule require owners and operators to ensure that levels of these six pollutants remain below a specified “action level.” Fenceline monitoring provides owners and operators the flexibility to determine what measures to take to remain below the action level, while ensuring that they are effectively controlling toxic air pollution.

The final rule will significantly reduce emissions of air toxins, especially those that are potentially harmful for surrounding communities. According to the EPA, these emission reductions will yield significant reductions in lifetime cancer risk attributable to these air pollutants, in addition to other health benefits.

The Hidden Dangers: Long-Term Effects of Mild Traumatic Brain Injury

Traumatic brain injuries can have life-changing impacts on a person’s life, and understandably so because they result from injuries to the brain either through a massive blow to the head or injury by a penetrative object into the brain matter.

However, not all types of traumatic brain injuries have quite dramatic symptoms, and a mild TBI (traumatic brain injury) is one such injury. They result from a relatively minor blow to the head or a jerking of the head, causing injuries to the brain tissue.

While most mild TBIs resolve in a few weeks, some can affect the victim’s life in the long term.

Symptoms of a Mild TBI

If you have suffered a blow to the head in an accident, you need to pay attention to your symptoms, as it can help you identify signs of a mild TBI, also known as a concussion. Symptoms like passing out briefly, headache, memory loss, confusion, loss of balance, sensitivity to light and noise, problems keeping balance, tingling in your fingers, etc., are indicative of a concussion.

However, other injuries can present similar symptoms, so it is best to have a doctor make that determination. Also, it is important to note that concussions can go undetected for days because they tend to have delayed symptoms.

Unfortunately, taking too much time before seeking medical attention for a mild TBI can introduce treatment gaps, which can result in complications when seeking compensation for the long-term effects of a concussion. A timely hospital visit helps create a link between an accident and symptoms that could show days after the accident. Which is why personal injury lawyers always insist on seeking medical attention even when you feel okay.

Long-Term Effects of a Mild TBI

While most effects of a concussion will be gone after 90 days of suffering an accident, and this is for cases of severe injuries, there are situations where the effects of an injury can last years or a lifetime. Common long-term effects of a mild TBI on a person’s life include:

LONG-TERM MEMORY LOSS

Memory loss is pretty common after a concussion. However, it involves losing a recollection of the few minutes before and after an injury.

In some cases, the affected person can start remembering things once forgotten. However, in severe cases, memory loss can impact a person’s life in the long term.

DEPRESSION

Many people will develop symptoms of depression after a concussion, usually as a result of chemical changes resulting from the brain injury. While most symptoms will disappear as the brain recovers, some people may have to live with the symptoms for an extended period.

In some cases, symptoms of depression won’t show until some time after other symptoms are gone.

COGNITIVE IMPAIRMENT

In most cases, the effect of a mild TBI on a person’s thinking and cognitive abilities resolves in a few months at most.

But there is no guarantee that your cognitive abilities will return to your pre-injury levels, especially with relatively severe concussions or injuries that went undetected for a long time.

Treatment and Support for Mild TBI

You may not need hospitalization after a TBI. Often, doctors focus on treating the symptoms and may prescribe cognitive and behavioral therapy to address the psychological and injury effects on a person’s mental well-being.

If the injuries resulted from an accident and another person’s negligence was to blame, you could consider talking to a personal injury lawyer to help recover damages.

Is the SEC’s Shadow Trading Win Proof That There is a Federal Common Law of Crime After All?

Last week, the U.S. Securities and Exchange Commission‘s Director of Enforcement celebrated a jury verdict in its insider trading case against Matthew Panuwat:

As we’ve said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple. Defendant used highly confidential information about an impending announcement of the acquisition of biopharmaceutical company Medivation, Inc., the company where he worked, by Pfizer Inc. to trade ahead of the news for his own enrichment. Rather than buying the securities of Medivation, however, Panuwat used his employer’s confidential information to acquire a large stake in call options of another comparable public company, Incyte Corporation, whose share price increased materially on the important news.”

I disagree, many have described the SEC’s theory of shadow trading as “novel”. More importantly, you won’t find it in Section 10(b) or Rule 10b-5, the ostensible bases for insider trading prosecutions. I have long decried the “make it up as you go along” aspect of insider trading jurisprudence:

Notably, Rule 10b-5 itself doesn’t explicitly mention insider trading. It would be more than a half century before the SEC finally adopted a rule, Rule 10b5-1 defining just one element of insider trading – when a purchase or sale constitutes trading “on the basis of” material non public information. It is no surprise then that federal courts have struggled to define who can be guilty of insider trading and why. The result is that the crime of insider trading has a decidedly “make it up as you go along” quality. Individuals don’t know where the lines are until the courts draw them and then convict. Consequently, people have gone to prison even as courts have adopted the theories for their convictions. The fact that the U.S. Supreme Court is still defining the crime more than seven decades after Mr. Freeman cobbled together Rule 10b-5 suggests that the definition of insider trading has been too inchoate to support criminal convictions. However “well tuned to an animating principle” a theory might be, I simply don’t think due process exists when a crime is only defined after a conviction.

If Congress truly believes that insider trading should be a crime, it should define the exact elements of the crime rather than leave it to the courts to make up the rules as they send people to prison. The California legislature has in fact done just that in Corporations Code Section 25402. For more on Section 25402, see my article, California’s Unique Approach to Insider Trading Regulation, 17 Insights 21 (July 2003).

Why Bassam Salman Should Not Have Been Convicted.

The willingness of federal courts to send people to prison based on a crime that isn’t expressed, much less defined, in any federal statute is at odds with the principle that only the people’s elected representatives in the legislature are authorized to make an act a crime. United States v. Hudson, 7 Cranch 32, 34, 11 U.S. 32, 3 L.Ed. 259 (1812). While the SEC’s case against Mr. Panuwat was civil, I expect that this novel theory will soon be applied in a criminal prosecution.

Incorporating AI to Address Mental Health Challenges in K-12 Students

The National Institute of Mental Health reported that 16.32% of youth (aged 12-17) in the District of Columbia (DC) experience at least one major depressive episode (MDE).
Although the prevalence of youth with MDE in DC is lower compared to some states, such as Oregon (where it reached 21.13%), it is important to address mental health challenges in youth early, as untreated mental health challenges can persist into adulthood. Further, the number of youths with MDE climbs nationally each year, including last year when it rose by almost 2% to approximately 300,000 youth.

It is important to note that there are programs specifically designed to help and treat youth that have experienced trauma and are living with mental health challenges. In DC, several mental health services and professional counseling services are available to residents. Most importantly, there is a broad reaching school-based mental health program that aims to provide a behavioral health expert in every school building. Additionally, on the DC government’s website, there is a list of mental health services programs available, which can be found here.

In conjunction with the mental health programs, early identification of students at risk for suicide, self-harm, and behavioral issues can help states, including DC, ensure access to mental health care and support for these young individuals. In response to the widespread youth mental health crisis, K-12 schools are employing the use of artificial intelligence (AI)-based tools to identify students at risk for suicide and self-harm. Through AI-based suicide risk monitoring, natural language processing, sentiment analysis, predictive models, early intervention, and surveillance and evaluation, AI is playing a crucial role in addressing the mental challenges faced by youth.

AI systems, developed by companies like Bark, Gaggle, and GoGuardian, aim to monitor students’ digital footprint through various data inputs, such as online interactions and behavioral patterns, for signs of distress or risk. These programs identify students who may be at risk for self-harm or suicide and alert the school and parents accordingly.

Proposals for using AI models to enhance mental health surveillance in school settings by implementing chat boxes to interact with students are being introduced. The chat box conversation logs serve as the source of raw data for the machine learning. According to Using AI for Mental Health Analysis and Prediction in School Surveys, existing survey results evaluated by health experts can be used to create a test dataset to validate the machine learning models. Supervised learning can then be deployed to classify specific behaviors and mental health patterns. However, there are concerns about how these programs work and what safeguards the companies have in place to protect youths’ data from being sold to other platforms. Additionally, there are concerns about whether these companies are complying with relevant laws (e.g., the Family Educational Rights and Privacy Act [FERPA]).

The University of Michigan identified AI technologies, such as natural language processing (NLP) and sentiment analysis, that can analyze user interactions, such as posts and comments, to identify signs of distress, anxiety, or depression. For example, Breathhh is an AI-powered Chrome extension designed to automatically deliver mental health exercises based on an individual’s web activity and online behaviors. By monitoring and analyzing the user’s interactions, the application can determine appropriate moments to present stress-relieving practices and strategies. Applications, like Breathhh, are just one example of personalized interventions designed by monitoring user interaction.

When using AI to address mental health concerns among K-12 students, policy implications must be carefully considered.

First, developers must obtain informed consent from students, parents, guardians, and all stakeholders before deploying such AI models. The use of AI models is always a topic of concern for policymakers because of the privacy concerns that come with it. To safely deploy AI models, there needs to be privacy protection policies in place to safeguard sensitive information from being improperly used. There is no comprehensive legislation that addresses those concerns either nationally or locally.
Second, developers also need to consider and factor in any bias engrained in their algorithm through data testing and regular monitoring of data output before it reaches the user. AI has the ability to detect early signs of mental health challenges. However, without such proper safeguards in place, we risk failing to protect students from being disproportionately impacted. When collected data reflects biases, it can lead to unfair treatment of certain groups. For youth, this can result in feelings of marginalization and adversely affect their mental health.
Effective policy considerations should encourage the use of AI models that will provide interpretable results, and policymakers need to understand how these decisions are made. Policies should outline how schools will respond to alerts generated by the system. A standard of care needs to be universally recognized, whether it be through policy or the companies’ internal safeguards. This standard of care should outline guidelines that address situations in which AI data output conflicts with human judgment.

Responsible AI implementation can enhance student well-being, but it requires careful evaluation to ensure students’ data is protected from potential harm. Moving forward, school leaders, policymakers, and technology developers need to consider the benefits and risks of AI-based mental health monitoring programs. Balancing the intended benefits while mitigating potential harms is crucial for student well-being.

For more news on Artificial Intelligence and Mental Health, visit the NLR Communications, Media & Internet section.

Ninth Circuit Rules Against Apache in Dispute Over Sacred “Oak Flat” Site

On March 1, the U.S. Court of Appeals for the Ninth Circuit sided with a lower court decision denying an Apache interest group’s motion for a preliminary injunction against the transfer of copper-rich federal land to private company Resolution Copper.

Oak Flat, a piece of land that the Ninth Circuit acknowledges is “a site of great spiritual value to the Western Apache Indians,” has been at the center of the dispute largely due to the significant copper ore deposits it sits on. Through the Land Transfer Act, Congress directed the federal government to transfer the land to Resolution Copper, which would then mine the ore. Apache Stronghold sued the government, seeking an injunction against the land transfer on the ground that the transfer would violate its members’ rights under the Free Exercise Clause of the First Amendment, the Religious Freedom Restoration Act (“RFRA”), and an 1852 treaty between the United States and the Apaches. The Ninth Circuit disagreed, holding that Apache Stronghold was unlikely to succeed on the merits on any of its three claims before the court.

First, the Ninth Circuit found that under the Supreme Court’s controlling decision in Lyng. There, the Supreme Court held that while the government’s actions with respect to “publicly owned land” would “interfere significantly with private persons’ ability to pursue spiritual fulfillment according to their religious beliefs,” it would also have no “tendency to coerce” them “into acting contrary to their religious beliefs.” The Ninth Circuit also found that the transfer of Oak Flat for mining operations did not discriminate against nor penalize Apache Stronghold’s members, nor deny them an “equal share of the rights, benefits, and privileges enjoyed by other citizens.”

Second, Apache Stronghold’s claim that the transfer of Oak Flat to Resolution Copper would violate RFRA failed for the same reasons because “what counts as ‘substantially burden[ing] a person’s exercise of religion’ must be understood as subsuming, rather than abrogating, the holding of Lyng.”

Finally, the court ruled that Apache Stronghold’s claim that the transfer of Oak Flat would violate an enforceable trust obligation created by the 1852 Treaty of Sante Fe because the government’s statutory obligation to transfer Oak Flat abrogated any treaty obligation.

The case demonstrates the difficulty Tribes have in stopping major development projects on federal land on religious grounds.

Congress Introduces Promising Bipartisan Privacy Bill

U.S. Senator Maria Cantwell (D-WA) and U.S. Representative Cathy McMorris Rodgers (R-WA) have made a breakthrough by agreeing on a bipartisan data privacy legislation proposal. The legislation aims to address concerns related to consumer data collection by technology companies and empower individuals to have control over their personal information.

The proposed legislation aims to restrict the amount of data technology companies can gather from consumers. This step is particularly important given the large amount of data these technology companies possess. It would grant Americans the authority to prevent the sale of their personal information or request its deletion. This step gives individuals more control over their personal data. The Federal Trade Commission (FTC) and state attorneys general would be given significant authority to monitor and regulate matters related to consumer privacy. This measure will ensure that the government has a say in matters associated with consumer privacy. The bill includes robust enforcement measures, such as granting individuals the right to take legal action. This step is necessary to ensure that any violations of the legislation are dealt with effectively. While targeted advertising would not be prohibited, the proposed legislation would allow consumers to opt out of it. This step gives consumers more control over the ads they receive. The privacy violations listed in the legislation would also be applicable to telecommunications companies. This measure ensures that no company is exempt from consumer privacy laws. Annual assessments of algorithms would be conducted to ensure that they do not harm individuals, particularly young people. This is an important, step given the rise of technology and its impact on consumers, especially among younger generations.

The bipartisan proposal for data privacy legislation is a positive step forward in terms of consumer privacy in America. While there is still work to be done, it is essential that the government takes proactive steps to ensure that individuals have greater control over their personal data. This is a positive development for the tech industry and consumers alike.

However, as we reported on before, this is not the first time Congress has made strides towards comprehensive data privacy legislation,). Hopefully, this new bipartisan bill will enjoy more success than past efforts and bring the United States closer in line with international data privacy standards.

States Sue the Biden Administration to Stop Loan Relief Plan

On April 9, 2024, seven states filed suit against the Biden administration in an attempt to block its new “SAVE” plan, an income-driven repayment plan that leads to eventual loan forgiveness. The case is pending in the U.S. District Court for the Eastern District of Missouri.

Plaintiff states claim that the plan is unlawful because it evades limits Congress imposed for income-based repayment plans and sets arbitrarily high thresholds that would effectively create a grant program for student borrowers. Plaintiffs allege that the US Supreme Court struck down a similar plan last year proposed by the Biden administration which would have cost taxpayers $430 billion. See Biden v. Nebraska, 143 S. Ct. 2355, 2362 (2023). The states allege that the plan violates the Higher Education Act of 1965 and subsequent amendments, which allows student-loan cancelation to occur only after a borrower pays 15% of their disposable income (which is defined as 150% above the poverty line) after 25 years.

The states further allege that the disposable income threshold would increase from 150% to 225% above the poverty line and that the plan would only require borrowers to pay 5% of their income for 10 years before loans are cancelled, “gut[ting] the statutory purpose of providing loans.”

Plaintiffs seek a declaratory judgment that the relief plan is unlawful and injunctive relief.

Putting It Into Practice: State attorneys general continue to challenge Biden regulatory actions through litigation (previously discussed here and here). Given the success they have achieved thus far, it will be interesting to see how this litigation develops. We will continue to monitor the case for developments.

Supply Chains are the Next Subject of Cyberattacks

The cyberthreat landscape is evolving as threat actors develop new tactics to keep up with increasingly sophisticated corporate IT environments. In particular, threat actors are increasingly exploiting supply chain vulnerabilities to reach downstream targets.

The effects of supply chain cyberattacks are far-reaching, and can affect downstream organizations. The effects can also last long after the attack was first deployed. According to an Identity Theft Resource Center report, “more than 10 million people were impacted by supply chain attacks targeting 1,743 entities that had access to multiple organizations’ data” in 2022. Based upon an IBM analysis, the cost of a data breach averaged $4.45 million in 2023.

What is a supply chain cyberattack?

Supply chain cyberattacks are a type of cyberattack in which a threat actor targets a business offering third-party services to other companies. The threat actor will then leverage its access to the target to reach and cause damage to the business’s customers. Supply chain cyberattacks may be perpetrated in different ways.

Software-Enabled Attack: This occurs when a threat actor uses an existing software vulnerability to compromise the systems and data of organizations running the software containing the vulnerability. For example, Apache Log4j is an open source code used by developers in software to add a function for maintaining records of system activity. In November 2021, there were public reports of a Log4j remote execution code vulnerability that allowed threat actors to infiltrate target software running on outdated Log4j code versions. As a result, threat actors gained access to the systems, networks, and data of many organizations in the public and private sectors that used software containing the vulnerable Log4j version. Although security upgrades (i.e., patches) have since been issued to address the Log4j vulnerability, many software and apps are still running with outdated (i.e., unpatched) versions of Log4j.
Software Supply Chain Attack: This is the most common type of supply chain cyberattack, and occurs when a threat actor infiltrates and compromises software with malicious code either before the software is provided to consumers or by deploying malicious software updates masquerading as legitimate patches. All users of the compromised software are affected by this type of attack. For example, Blackbaud, Inc., a software company providing cloud hosting services to for-profit and non-profit entities across multiple industries, was ground zero for a software supply chain cyberattack after a threat actor deployed ransomware in its systems that had downstream effects on Blackbaud’s customers, including 45,000 companies. Similarly in May 2023, Progress Software’s MOVEit file-transfer tool was targeted with a ransomware attack, which allowed threat actors to steal data from customers that used the MOVEit app, including government agencies and businesses worldwide.

Legal and Regulatory Risks

Cyberattacks can often expose personal data to unauthorized access and acquisition by a threat actor. When this occurs, companies’ notification obligations under the data breach laws of jurisdictions in which affected individuals reside are triggered. In general, data breach laws require affected companies to submit notice of the incident to affected individuals and, depending on the facts of the incident and the number of such individuals, also to regulators, the media, and consumer reporting agencies. Companies may also have an obligation to notify their customers, vendors, and other business partners based on their contracts with these parties. These reporting requirements increase the likelihood of follow-up inquiries, and in some cases, investigations by regulators. Reporting a data breach also increases a company’s risk of being targeted with private lawsuits, including class actions and lawsuits initiated by business customers, in which plaintiffs may seek different types of relief including injunctive relief, monetary damages, and civil penalties.

The legal and regulatory risks in the aftermath of a cyberattack can persist long after a company has addressed the immediate issues that caused the incident initially. For example, in the aftermath of the cyberattack, Blackbaud was investigated by multiple government authorities and targeted with private lawsuits. While the private suits remain ongoing, Blackbaud settled with state regulators ($49,500,000), the U.S. Federal Trade Commission, and the U.S. Securities Exchange Commission (SEC) ($3,000,000) in 2023 and 2024, almost four years after it first experienced the cyberattack. Other companies that experienced high-profile cyberattacks have also been targeted with securities class action lawsuits by shareholders, and in at least one instance, regulators have named a company’s Chief Information Security Officer in an enforcement action, underscoring the professional risks cyberattacks pose to corporate security leaders.

What Steps Can Companies Take to Mitigate Risk?

First, threat actors will continue to refine their tactics and techniques. Thus, all organizations must adapt and stay current with all regulations and legislation surrounding cybersecurity. Cybersecurity and Infrastructure Security Agency (CISA) urges developer education for creating secure code and verifying third-party components.

Second, stay proactive. Organizations must re-examine not only their own security practices but also those of their vendors and third-party suppliers. If third and fourth parties have access to an organization’s data, it is imperative to ensure that those parties have good data protection practices.

Third, companies should adopt guidelines for suppliers around data and cybersecurity at the outset of a relationship since it may be difficult to get suppliers to adhere to policies after the contract has been signed. For example, some entities have detailed processes requiring suppliers to inform of attacks and conduct impact assessments after the fact. In addition, some entities expect suppliers to follow specific sequences of steps after a cyberattack. At the same time, some entities may also apply the same threat intelligence that it uses for its own defense to its critical suppliers, and may require suppliers to implement proactive security controls, such as incident response plans, ahead of an attack.

Finally, all companies should strive to minimize threats to their software supply by establishing strong security strategies at the ground level.

Importance of Negotiating Assignment and Subletting Provisions in Health Care Leases

In our ongoing series of blog posts, we examine key negotiating points for tenants in triple net health care leases. We also offer suggestions for certain lease provisions that will protect tenants from overreaching and unfair expenses, overly burdensome obligations, and ambiguous terms with respect to the rights and responsibilities of the parties. These suggestions are intended to result in efficient lease negotiations and favorable lease terms from a tenant’s perspective. In our first two blog posts, we considered the importance of negotiating initial terms and renewal terms and operating expense provisions. This latest blog post in our series focuses on negotiating assignment and subletting provisions.

It is imperative for a commercial tenant, particularly a private equity-owned health care tenant, to include provisions in a lease which allow the tenant the flexibility to assign and sublease the commercial space without the necessity of having to obtain the landlord’s consent and/or to meet burdensome landlord conditions.

Most leases prohibit transfers by assignment and subletting or require landlord’s prior written consent subject to meeting certain burdensome conditions. In addition, landlords often include a “change of control” provision which provides that sale of a controlling interest is deemed a transfer requiring landlord consent. A health care tenant looking for flexibility for reorganization or internal transfer subject to private equity control will want to push back on change of control provisions and will want to ensure that their lease allows for certain permitted transfers that do not require landlord consent. Carving out “permitted transfers” customarily includes transfers to: (i) an affiliate of the named tenant under the lease (meaning, any entity, directly or indirectly, which controls, is controlled by or is under common control with tenant); (ii) a successor entity created by merger, consolidation or reorganization of tenant; or (iii) an entity which shall purchase all or substantially all of the assets or a controlling interest in the stock or membership of tenant. If the tenant is a management services organization (MSO), the lease should also include explicit landlord permission for a sublease between the MSO and the provider that will occupy the leased premises.

Landlords may accept the concept of permitted transfers but often seek to impose certain conditions to allowing such transfers. Certain conditions on permitted transfers are reasonable, such as requirements for advance notice, that the proposed permitted transferee assume all obligations under the lease, that the permitted transferee operate only for the permitted use set forth in the lease, and that a copy of the transfer document be provided to landlord. However, other conditions, such as requiring a net worth test for the assignee or financial reporting requirements, can be burdensome and serve to undermine the concept of permitted transfers without landlord consent. We advise our clients in these instances to push back or limit these conditions as much as possible.

Other common assignment and subletting provisions should expressly not apply to permitted transfers. These include recapture provisions which allow a landlord to terminate the lease and recapture the space, excess profit provisions which provide that any excess profits realized as the result of a transfer will be shared between landlord and tenant, and administrative fees and reimbursements to landlord which are often charged to tenants in connection with an assignment or subletting request. Restrictions on transfers should not apply to guarantor entities. Often with private equity, the guarantor is the parent entity and cannot be restricted by a landlord as to transfer, restructuring or reorganization at the top of its organization.

In the case of transfers that do not fall within the definition of “permitted transfers” and require landlord consent, a tenant will want to include language that landlord will not unreasonably withhold, condition, or delay such consent. Other tenant protections should also be considered, including a cap on administrative and review fees reimbursable by tenant to landlord, a reasonably short time period for landlord to approve or disapprove a request (i.e., 30 days) or be deemed to have approved, a reasonably short time period for landlord to exercise recapture rights or be deemed to have approved, and a provision that excess profits will be shared equally rather than all belonging to landlord.

Negotiation of assignment and subletting terms is critical for tenants, particularly with respect to private equity-owned health care tenants. The goal for tenants in negotiating these points is to provide flexibility for addressing future financial and operational needs. As with other highly negotiated lease terms, we recommend addressing assignment and subletting provisions in detail in advance in the letter of intent. This makes expectations of the parties clear, saves time and money by avoiding protracted negotiations, and results in an overall efficient lease negotiation process.

In our next post, we will cover the importance of negotiating maintenance and repair terms and will offer suggestions for limiting a tenant’s exposure.

The National Law Forum

Using an LLC to Protect the Family Vacation Home

Like this:

Curb Your Pollution: EPA Issues Final Rule to Reduce Toxic Air Pollution

Like this: