The Deeper Details of Contract Assumption
When completing the acquisition of an urgent care business, the seller has the choice to either assume or reject contracts. Based on current contracts in place on either side there are numerous risks and benefits of the decisions made on the contracts for either party.
Ron Lebow, attorney for Michelman and Robinson says that most anyone operating an urgent care facility has numerous agreements.
“If you are an operating facility you have agreements with vendors for supplies. You have agreements with equipment lessors for your X-ray, ultrasound machine, or MRI. You have agreements with an electronic medical record company, agreements for the space, and even some personnel ,” Lebow says.
Lebow says when making a decision, the buyer wants to determine which of those agreements they want to take over, and which of those agreements that they want terminated.
“If they want the x-ray machine or MRI, they are obviously going to want to take over that asset, in which case you have to involved the lessor in that discussion to make sure they consent to the assignment. Just saying you are assigning the agreement without going through the lessor of the equipment could result in default under the lease agreement and acceleration of all payments owed in the future. The lessor has a lien on that equipment, and can take possession, so you would have to involve them,” Lebow says.
Lebow says the case with vendor agreements is, that in many circumstances, buyers are larger enterprises so they may have their own agreements that have more favorable pricing. The seller would then want to make sure that they cancel their own vendor contracts.
Lebow stresses that the seller always remember that they are on the hook and can be sued for the amount owed if they do not carefully review what agreements are terminable, and what their exposure is if the buyer doesn’t take over a lease. If they determine that the exposure is significant, they are going to want the buyer to maybe include an extra payment on the purchase price to cover that loss.
Otherwise, Lebow says the purchase price is understated because there are extra costs that the seller is going to incur as a direct result of the sale.
Robert Homchick, partner at Davis Wright Tremaine says that If the sale is an asset sale and you are purchasing assets, you are going to have a hard time assuming payor contracts. However, if you are buying an entity, you would have a change of control and other filings.
“In the case that an entity that is a provider in its own right, if you purchase the legal entity you may be able to assume the payor contracts. If you just buy the assets your ability to assume those would be limited,” Homchick says.
Though Homchick says that payor contracts are difficult to obtain in an asset sale, Thomas Hawk III, partner at King and Foley says that there are ways to simplify the process if need be.
“Very often, you will assume, importantly, the Medicare provider agreement. Under law, there is an automatic assignment by Medicare of the Medicare Provider Agreement. You can go through a series of steps to refuse automatic assignment. It’s possible to leave that behind, it’s just more difficult given the governments rules,” Hawk says.
Hawk explains that managed care payor agreements are another important contract to consider. If you are already in the urgent care business, and already have a bunch of managed care agreements, you may not assume the existing ones at the center you are buying. However, if you don’t, you need those. Or if the agreement is more favorable than the one you have already got, then you would typically assume the agreements. This is the same with the state Medicare program, Hawk says.
According to Lebow, real estate and leases can also be an issue with assumed contracts.
“If there is a landlord, you would have to get the consent to sign it. You have to carefully look at the lease to make sure it is even assignable. If it is assignable, it may have strings attached. There are a lot of risks when you try to assign a lease. In some cases the landlord can declare that just by virtue of asking for the assignment, that the landlord has the right to take the space over. In that case, the whole purchase is threatened,” Lebow says.
“The lease agreement may require absolute consent by the landlord, in which case if the landlord doesn’t consent, then the seller is going to be on the hook for the lease for the remainder of the term even though they are no longer running the facility. The landlord would be going after both the seller and the buyer.”
Lebow says that typically, the landlord will not release the seller from the lease, but that risk can be hedged by attorneys who know how to minimize the risk for the seller when the lease is handed off to a third party.
Hawk adds that to the extent that there is a real property lease for this space, and it’s not owned, you will typically assume operating contracts that are related to the space like the power company agreement, the phone agreement and other things of that nature.
The Bottom Line
Hawk breaks down the reasons that a buyer would either choose or not choose certain assets in an acquisition.
“The reason you would choose certain assets is for business purposes and you would exclude those assets that you don’t need and you don’t want to pay for. With respect to liabilities it depends on how much of the business that you are buying. For instance, in the context of an urgent care center deal, if you are in the business of urgent care and you have a lot of centers, you’ve got suppliers that already give you everything you need; you’ve got an agreement with property management companies and janitorial services; you’ve got all that. You don’t need any of that from the other company. You may just literally want to buy the real property, if not the lease to the property. You could buy the equipment in that and then leave all of the service contracts behind because you don’t need them. You have those already,” Hawk says.
Hawk says that thing like service contracts are both assets and liabilities. The benefit of having the contract itself is an asset, it’s a valuable right. However, contracts also have corresponding obligations to pay under their terms and those are liabilities.
“If you leave the agreements behind, and it’s an asset deal, and you do not assume the asset, then the seller is typically responsible for terminating that contract and the seller may be responsible for any obligations that result from a termination. For example, a termination fee would be something that the seller would be obligated to pay in this case,” Hawk says.
“The seller may try to get the buyer to agree in the contract otherwise, but unless that agreement is made, the default is it is the seller’s responsibility.”
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