With rent typically being the second largest expense after salaries for small businesses, the property lease becomes a very important document if you are thinking about selling your business.

When was the last time you reviewed the lease on your business premises? When you signed it years ago? The following aspects of your lease should be reviewed before selling:

  • Is the lease transferable / assignable to a new owner?  An assignment is very similar to a sublease, except the new tenant takes on the rights and obligations of the entire lease for the rest of the time remaining on the lease.   The original tenant is usually still liable for all the obligations of the original lease until it runs out.
  • Is there a transfer fee involved?
  • What does the Landlord require to approve the new owner on the lease?
  • Is there an option to renew the lease after the current term?
  • When does the Landlord have to be notified to renew?

You want to get this part of the sale process done relatively early. Landlords don't like surprises. A deal can fall apart quickly if a Landlord is informed at the last minute that a new owner is about to take over the current business. It is better to work with the Landlord to iron out the details before you get too far into the deal. Determine the Landlord's willingness of renewing or transferring the lease to a new owner and what qualifications of such new owner are expected.

Also of importance is how much time is remaining on the lease and whether there are any extension periods. The lease terms of the business space can be a major consideration for a buyer. For example, a distribution company with a long-term lease on a good location can be attractive. But a long-term lease on a business needing more space to grow could be a detriment. Or, there can be concerns about an expiring lease when the landlord might demand a large increase. When it comes time to negotiate a new lease, business owners must carefully think through the timing of their plans for exiting their business.

The proper time to involve the Landlord would be when a contract to purchase the business is in place and is likely to work out. But, remember, the examination of your lease should take place prior to putting the business on the market.

Who is Responsible for Seeking Consent?  The outgoing tenant will make an application for transfer to the Landlord. To successfully assign a lease from one party to another, the landlord of the premises must:

  • receive an application from the outgoing tenant and the prospective incoming tenant;
  • check the prospective tenant’s references and business skills;
  • provide consent; and
  • prepare the appropriate documentation.

A landlord can only refuse their consent on a limited number of reasonable grounds. These grounds vary state by state depending on the relevant lease legislation and generally relate to either:

  • the incoming tenant’s finances (i.e. their capacity to pay rent)
  • issues with their character.
  • The landlord has discretion to refuse any proposed transfer of a commercial lease. The assignment clause in the lease for the premises will dictate the terms of the proposed assignment. Note that some commercial leases expressly prohibit assignment under any circumstances.

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