Lease Structure in M&A: Where Deals Quietly Win or Lose

When a business is acquired, but the real estate is retained by the seller, the lease agreement becomes one of the most overlooked – and most consequential – documents in the entire transaction.

Too often, it’s treated as a side negotiation. In reality, it directly impacts risk allocation, insurance recovery, operating costs, and long-term alignment between landlord and tenant.

Poorly structured leases don’t just create friction – they also create coverage disputes, uninsured losses, and expensive litigation as carriers point fingers at one another.

Well-structured leases, on the other hand, quietly protect both sides and eliminate ambiguity before it ever becomes a claim.

The Core Issue: Who Insures the Building?

At the heart of most post-transaction lease structures is a fundamental decision:

1. Landlord Insures the Building

• Landlord controls property coverage, limits, and carriers.
• Ensures the asset is protected to their standards
• Cost is typically passed through to the tenant (directly or via rent)

The tradeoff:
While this benefits the landlord from a control standpoint, it often introduces a disconnect on cost sensitivity.
The landlord is making insurance decisions… but the tenant is the one paying for them.

This can lead to:

• Higher premiums than necessary
• Over- or under-structured programs relative to the tenant’s operations
• Tension over pass-through expenses

2. Tenant Insures the Building

• Tenant places property, liability, and umbrella coverage.
• The landlord is protected under the lease requirements (additional insured, loss payee, etc.).
• Tenant integrates coverage into their broader insurance program

The advantage:
Tenants can often insure the building more efficiently and holistically, bundling it with:

• General liability
• Umbrella/excess liability
• Operational risks

This approach typically creates:

• Better cost efficiency
• Fewer coverage gaps
• Stronger alignment with actual operational exposures

The requirement:
This strategy only works if the lease language is precise, enforceable, and aligned with insurance reality.

There Is No “One Right Answer”

The optimal structure depends on:

• Industry risk profile
• Insurance market conditions (hard vs. soft markets)
• Relative bargaining power
• Risk tolerance of the landlord
• Sophistication of the tenant’s insurance program

In some markets, it may be more economical for landlords to insure.
In others, tenants can secure significantly better outcomes.

The key insight:
This is not a “set it and forget it” decision.

The most effective lease structures allow for ongoing evaluation and flexibility, ensuring both parties can adapt if a different approach becomes more advantageous over time.

Advanced Strategy: Shifting Risk Intentionally

Depending on risk tolerance, landlords can structure leases to:

• Transfer most – or nearly all – risk to the tenant.
• Require tenant-carried:
  • Property coverage
  • General liability
  • Umbrella/excess liability
  • Business interruption/loss of rents protections

When executed properly:

• The landlord reduces exposure and administrative burden.
• The tenant gains control and often improves cost efficiency

But when executed poorly:

• Coverage gaps emerge.
• Claims turn into disputes.
• Carriers subrogate against one another.

Where Deals Break: Misalignment Between Lease and Insurance

The biggest failures occur when:

• Lease language and insurance policies don’t match.
• Both parties insure the same asset without coordination.
• Responsibility is ambiguous or duplicated.

This is how you end up with:

• Two carriers involved
• Neither agrees to pay first
• Each pointing back to the lease

Practical Tips to Get It Right

1. Engage a Qualified Insurance Advisor Early

Not all brokers are built for this. You need someone who:

• Understands M&A transactions
• Knows how to translate lease language into an insurance structure
• Has experience in the specific industry involved

This is diligence – not just placement.

2. Start Lease Negotiations Early

Insurance should not be an afterthought. Early negotiation allows:

• Time to model different insurance structures
• Alignment between legal, financial, and risk stakeholders
• Avoidance of last-minute compromises that create long-term problems

3. Share Lease Drafts with Your Insurance Advisor

Before anything is finalized:

• Have your broker or diligence advisor review the lease language.
• Confirm it is insurable, realistic, and aligned with the actual policy.s
• Identify gaps before they become claims.

4. Align Risk with the Party Best Positioned to Manage It

Ask:

• Who can insure this most efficiently?
• Who has the broader program to absorb the risk?
• Who is ultimately paying for it?

Efficiency and control should be aligned – not separated.

5. Build in a Review Mechanism

Markets change. Businesses evolve.

Include provisions to:

• Revisit insurance structure periodically
• Adjust responsibilities if economics or risk profiles shift
• Keep both parties aligned over time

6. Completely Eliminate Ambiguity 

Your lease should clearly define:

• Who insures what
• Required limits and coverages
• How claims are handled
• Waivers of subrogation
• Additional insured and loss payee structures

If it’s open to interpretation, it’s a potential source of future dispute.

Final Thoughts

The lease agreement in an M&A transaction is not just a legal document – it’s a risk allocation strategy.

Handled correctly, it:

• Reduces cost
• Prevents disputes
• Aligns incentives
• Protects both parties

Handled poorly, it:

• Creates friction
• Drives up expenses
• Leads to uncovered losses
• Puts relationships and deals at risk

The difference isn’t complexity. It’s intentionality, alignment, and early involvement of the right expertise.