Legal And Financial Issues

Buying a business will often include the assumption of a lease for the premises occupied by the business for sale. There can be a number of significant issues involved with the lease and I have seen several deals fall apart as a result of a buyer not being able to get a satisfactory assignment of the lease.

One thing a buyer needs to keep in mind is that it’s not often advisable to consider relocating the business unless it’s truly the type where the location has zero bearing on the company results.

Insofar as the lease is concerned, get a copy of the current one as quickly as you can and review the clause(s) on assignment and transfers.

The language you want to see is that while the lease may only be subject to assignment upon written approval of the landlord, the key verbiage is that any assignment “will not be unreasonably withheld.”

This means that unless the landlord has a very valid reason, they have to allow the assignment.

Generally speaking, landlords are accommodating to lease transfers but not always.

One would think that a landlord’s only goal is to keep the premises occupied by a paying tenant, but it’s not always the case.

That’s why a buyer has to deal with this aspect of the deal very soon after the parties have an agreement in place. This is also a good time to extend the lease – once the landlord is going to assign it, you may as well try to negotiate an extension – even if adding an option or two to the existing lease.

Be sure to calculate rent increases into your financial models since you will be inheriting the new lease rates after you buy the business.

A buyer should be prepared to provide a landlord with their personal financial information.

You’ll also want to avoid having to provide a personal guarantee of the lease, if possible. Again, some landlords require it.

At the very least, if you must do so, include a clause that releases you after 1-12 months as long as you’ve paid the rent on time up to that point.

Another consideration is the deposits. A new tenant – which a business buyer is deemed to be, will have to replace the deposits that the seller may have made with the original lease. These can be quite large as they can include first and last month’s rent, plus a security deposit.

While it’s true that leases typically get assigned without too much aggravation when buying a business, it’s not always the case.

Understanding the key issues you’ll face and doing so early on can ultimately save you a lot of heartburn later – imagine going through the entire deal only to find out the landlord simply will not assign the lease, or will only consider a new one at terms that are prohibitive?

In order to completely avoid that possibility, address the lease transfer/assignment early on in the business for sale process.


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