Selling or purchasing a business? Don’t forget the lease!

When selling or purchasing a business, it is important not to overlook the assignment of a lease of the premises from which the business is run and to consider the following:

1:  The terms of the lease

The majority of leases require the consent of the landlord in writing before a lease can be assigned to the purchaser of a business.  (The exception is generally where the lease provisions permit certain types of assignment for example – the transfer of the majority of the tenant entity’s shares to another related tenant entity.)

Generally a landlord (acting reasonably) can either refuse to assign a lease because the new tenant is not suitable (more on this below) or impose reasonable conditions to giving consent.  Conditions attached to consent can include the provision of a bank guarantee, security deposit or personal guarantee, or a certificate of insurance that complies with the insurance requirements under the lease.

2:  What evidence is required?

The most common forms of consent include a letter of consent to the assignment executed by the landlord or a deed of assignment executed by all parties.

The particular requirements of your landlord, bank or franchisor may determine the type of consent you need.  It is important to consider the timing of when the landlord can provide the relevant form of consent as the sale and purchase of the business may be conditional upon a third party (such as a franchisor or bank) receiving a fully signed deed of assignment at settlement.

3:  Communicate with all relevant parties!

Good communication between the vendor, purchaser, landlord and their solicitors is vital.  Depending on the complexity of the matter, a real estate agent, franchisor, accountant, bank and insurance company may also need to be involved.

It is important that everyone is aware of timeframes (including settlement date) and the requirements of each party so that the business remains open and continues to trade during the settlement process.

4:  What information might the landlord need?

The landlord or its agent should be contacted as early as possible to find out what information is required about the purchaser.  As the landlord will be assessing the purchaser’s suitability as a tenant under the lease, it is likely it may need information about its trading history or a statement of assets and liabilities of those who will be responsible for payment of rent.  While each lease is different, it’s common for the landlord to have up to 21 days to consider the material before it makes a decision on consent to the assignment.

5:  Who is to pay costs and how much?

It is common for the landlord to require the vendor to pay the landlord’s reasonable legal costs associated with the assignment.  The vendor and purchaser may separately agree to share these costs under their business sale agreement, and the landlord should provide an estimate of these costs prior to settlement.

Page Seager deals with all aspects of business sales.  Whether you are a landlord, purchaser or vendor, please contact us should you require assistance.

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