Articles

Considering buying or selling a business?  Read the lease and talk to the landlord first

By Rick Barra, Esq.

 

        We often receive excited phone calls from clients who tell us they want to sell or buy a business and have already worked out all of the terms with the other party. They want to know how fast they can close and how long it will take to prepare the documents. When we ask if the landlord has approved an assignment of the lease to the new buyer and agreed to release the seller, we typically hear dead silence on the other end of the phone.

        Before proceeding too far with negotiations and spending too much money and effort, the seller and buyer of a business need to review the terms of the existing lease for the business premises to: (1) determine if the remaining length of the lease and other terms and conditions are acceptable to the buyer; and (2) see what conditions are placed on an assignment of the lease by the seller.

        Most commercial leases will not allow an assignment without the advance written consent of the landlord. Leases also often specifically say that even if the landlord consents, the “old” tenant will not be released from liability. Some leases also require payment of a review fee for the landlord to even consider an assignment, which oftentimes is $1,000 or more. Other leases even provide that the rent or other amounts payable will be increased in the event of an assignment.

        These are important points that need to be considered by both seller and buyer. Will a seller still want to sell the business if the seller remains liable under the lease for the remainder of the lease term? Will a buyer want to pay the assignment review fee or increased rent?

        So before a business seller and buyer “finalize” the terms of their deal, they need to review the lease and then talk to the landlord to see what will be required in order for the landlord to consent to an assignment and a release of the seller. Although the lease may have specific requirements for assignment, landlords may agree to less onerous terms depending on the market and other conditions. For example, the lease may say that the old tenant will not be released, but the landlord will still agree to the release, if the landlord realizes that the deal may die and he will be stuck with the old, less desirable tenant.

        Remember also that when dealing with a landlord, you are dealing with a third party whose interests differ from those of the seller and buyer and who does not necessarily care that the seller and buyer have agreed to terms or established a deadline for closing.