Sale-leaseback transactions spanning multiple states can offer significant financial advantages, but they also require careful navigation of a patchwork of state-specific legal requirements. One threshold issue that can catch parties off guard early in the process is the applicability of state bulk sales, transfer, or withholding laws. Originally designed to protect creditors when a business sells substantially all of its assets, these statutes can impose notice, escrow, or withholding obligations on the buyer in a sale-leaseback transaction. Clearance certificates or notices can involve long lead times and should be addressed at the outset of the acquisition process.
Parties should take special care to confirm whether the type of transaction in question will actually trigger these laws. For example, a transfer of only real estate, without any other business assets, might not fall within the scope of bulk sale requirements in certain states. Other states, however, have taken a broader approach. Pennsylvania, for instance, includes real estate within the definition of assets subject to its bulk sale laws.
In Illinois, Section 9-902(d) of the Illinois Income Tax Act, as amended, or 35 ILCS 120/5j of the Illinois Compiled Statutes may be triggered when a seller transfers a substantial portion of its assets. Buyers should evaluate early in the diligence process whether the transaction constitutes a bulk sale under Illinois law and, if so, what compliance steps are required to avoid successor liability. These steps may include creditor notification or obtaining tax clearance certificates. In addition to the state-level requirements, some counties and cities in Illinois have their own additional clearance processes that must also be satisfied.
Pennsylvania presents similar concerns. Under Pennsylvania's bulk sale laws, a purchaser of business assets — which includes real estate — may be held liable for certain of the seller's unpaid sales, income, or wage withholding taxes unless proper notice is given to the Pennsylvania Department of Revenue and a clearance certificate is obtained. Pennsylvania's bulk sale law applies when taxpayers transfer more than 51 percent of their assets, including real property, machinery, and equipment.
Given the potential for successor liability and the lead times involved in obtaining clearance certificates, parties to cross-state sale-leaseback transactions should identify bulk sale and withholding obligations as early as possible in the deal process. Engaging experienced counsel to navigate these requirements is essential to avoiding costly surprises at closing.