Big Bear Power: The Bear Minimum

Topics: Renting, Leasing, Lease, Business terms, Gas turbine, Leasehold estate / Pages: 2 (374 words) / Published: Jun 24th, 2014
Case 08-4
The Bear Minimum
Big Bear Power (Big Bear) is a widely held public utility company that has posted strong financial results for several years. Big Bear has positive cash flow, and it is in compliance with all its debt covenants. Big Bear leases a combustion turbine from Goliath Co.
(Goliath) for a 10-year noncancelable term. The lease agreement is signed on December
15, 2010, and Big Bear’s right to use the turbine begins on January 1, 2011. Various provisions and other facts from the lease are listed below.
Provision 1
Big Bear pays Stipe, Berry, Mills and Buck LLP, its external legal counsel, $500,000 in connection with negotiating the lease agreement. Big Bear is also required to pay $1 million of legal fees incurred by Goliath.
Provision 2
The stated default provisions in the lease stipulate that Big Bear must purchase the combustion turbine from Goliath (at a price equal to the remaining lease payments) within 30 days if a “change in control” event occurs. Additionally, Big Bear would be required to pay a penalty of $500,000. A “change in control” event is defined under the lease as either (1) a situation in which a person or entity becomes the beneficial owner, directly or indirectly, of 50 percent or more of the outstanding voting shares of Big Bear or (2) a situation in which Big Bear merges with another entity. As of the inception of the lease, Big Bear does not expect a “change in control” event to occur during the term of the lease.

Provision 3
The lease agreement stipulates that Big Bear’s lease payments shall be $1 million per year, payable ratably over 12 months at the beginning of each month. For each calendar year of the term of the lease after 2011, Big Bear will pay minimum rent in an amount equal to $1 million increased (but not decreased) by the same percentage as the increase in the consumer price index (CPI) from January 1 of the prior year until January 1 of each respective year. As of the inception of

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