Selling your business? What tenants need to know about their lease
Thursday, December 11, 2014
Whether we're speaking at a franchise convention, healthcare workshop or a restaurant expo, we are magnets for tenants' questions. Here are just a few considerations pertaining to commercial lease assignments:
What is a commercial lease assignment?
If you are looking to sell (or buy) an existing business, don't overlook the commercial lease assignment. To define this term, a lease assignment is an agreement or procedure that transfers the leasehold interest and obligations from one tenant to another so a new lease does not have to be negotiated.
Lease assignments occur most often when a business is sold. To avoid potential disaster, managing a commercial lease assignment must be done effectively and properly.
What are you selling?
You are selling an established business and its location, including customer goodwill, leasehold improvements, fixtures, signage, etc. From the buyer's perspective, your physical location or the commercial lease on your location, is important.
Therefore, you are loosely selling the opportunity to control this piece of real estate — and that has value.
Check the lease agreement
The lease assignment, or transfer clause, is of one of the vital organs of a commercial lease agreement. Within the lease agreement there may be conditions such as personal guaranties and increased deposits imposed on the business seller (tenant assignor) and the buyer (assignee).
If you mishandle the lease assignment process, you may lose a prospective buyer due to landlord delays and/or interference.
The rights of the tenant
Unless you negotiated on this clause when you first leased the premises, chances are you are in danger. The landlord is not required to include an assignment clause (or even a reasonably fair one) in the lease agreement.
You must negotiate and demand that your tenant rights are included, because almost every independently-owned business eventually sells
Assignment timing issues
If the landlord stalls approving the lease assignment, the purchaser may get tired of waiting and walk away. Some lease agreements do not stipulate a limit on how long the landlord can take for the approval process (30/60 days). For a tenant, you will want the approval process to take 10-15 days maximum to avoid losing a purchaser's interest.
The approval process
Try to determine up front what the landlord wants for financial information and what the proposed assignee is willing to provide.
In some cases, the purchaser comes out looking like a desirable tenant, but he/she may have a heavy debt load or little professional experience running a business. Landlords can be sensitive to this since they are accustomed to you (the existing tenant) paying their rent on time, etc.
Renewal option clauses
Often, your business purchaser wants to assume your lease-renewal option clause (if you have one). This means that the purchaser has some certainty that if he buys your business with only 18 months left on the lease term, he cannot be kicked out by the landlord at that time (they can use the renewal option clause).
Don't assume the renewal option clause is transferable to the buyer.
The assignment processing fee
These fees range dramatically from $0 to $2,500, but $500-$1,000 is typical. The seller must usually pay this amount and notify to the landlord (in writing) to initiate the process.
Remember that the assignment agreement is negotiable. You can often negotiate for additional points such as the deposit, renewal options, guaranty, etc. Be aware — the landlord may stipulate the seller (assignor) be responsible for the lease if the buyer (assignee) defaults.
Tens of thousands of businesses are bought and sold each year. And they almost all require a lease assignment or negotiation with the landlord.
A landlord can deliberately or creatively sabotage lease assignments. They may do this out of fear that the new tenant who is buying your business may default on rental payments. Or it could be that the landlord agrees to the assignment but wants a higher rental rate, greater deposit or a personal guaranty (or all of those things) from the assignee buying your business.
Remember that from the landlord's perspective a lease assignment is often a lateral move, even a nuisance. The tenant is the one making money from the sale of the business, while the landlord simply continues to collect the same rent, but possibly from an unproven tenant or business person.
The landlord's actions could kill the sale of your business or make you rethink buying such a business, depending on which side of the tracks you're on. It can be tough to navigate these potentially dangerous waters so that you and the person you are selling your business to benefit from the terms.
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