When a business is being sold, buyers often associate the real estate as part of the business. But in many cases, the seller does not actually own the commercial building in which they run their business from. They likely have a commercial lease agreement established with the true owner of the building. This means when the business is sold, the seller will need to create a lease assignment which transfers their interest in the commercial lease over to the buyer.
In other words, the buyer will take over all the obligations and interests that are still attached to the seller’s lease agreement with the landlord.
A commercial building is merely a place where the company operates. When a business is purchased, the buyer is taking ownership of the business name, clientele or customer list, physical items, inventory, fixtures, and any leasehold improvements that were made. If a buyer were to want a different location for the business, they’d still be obligated to take over the existing lease until it expires. It is better for the buyer to just stay in the same building anyway because its customers are already used to the location.
Video: About assignment of leases from the current business owner to the buyer | by Argon Law - Legal Advice
As the seller, it is important that you construct your commercial lease agreement appropriately so that your buyer takes over all responsibility of the lease and that you do not. Below are 10 tips that can give you further insight into helping you selling your business when there’s a lease attached.
1. Contact the Landlord Immediately
As soon as you plan to sell your business, you should notify the landlord right away. Do not wait until you have a sale pending with a buyer before you tell them. Remember that the landlord has rights in this situation too. The original lease agreement is between the seller and the landlord. The seller will not be able to establish a commercial lease assignment with a buyer unless the landlord approves it. So, if you were to wait a few days before your business is sold to tell your landlord, they may not approve the sale. Then you would lose your buyer and would have to spend more time finding another one.
In some states, the landlord may not legally be able to stop the sale of a business. It really depends on the laws of the state in which the business is being sold in. You should also check the original lease agreement to see if it has an assignment clause. Most of the time, the landlord would need a good reason to legally hold up the sale of a business. This would involve a lot of litigation and legal proceedings that would end up costing the seller time and money. That is why it is always better to be on the landlord’s good side and keep them in the loop about the sale from the very beginning. Then there won’t be any surprises down the road that will hold up the sale.
Subleases are different than commercial lease assignments. With a sublease, the seller is still retaining their responsibility for the master lease that they have with their landlord. At the same time, the seller would be creating another lease with the person who is buying their business. This is what a sublease would be in this situation. However, the landlord would have to approve the seller’s sublease because the master lease is what holds more legal value. If the master lease were to have a clause forbidding any kind of subleasing, then the seller wouldn’t be able to do that.
The reason a seller would want to sublease to their buyer in the first place is if they’re only selling a portion of the business or if they’re financing part of the total sale price for the buyer. In these circumstances, the seller would still have obligations toward the business so they would want to still be in control over the real estate. A sublease would give the seller full access to the property while the buyer is using it. The seller retains this control until they receive the total amount of the sale price. After that, the sublease can be terminated and a commercial lease assignment can be made.
3. Read Your Original Lease
This cannot be emphasized enough. Sellers should understand all the terms and conditions regarding the lease they currently hold with the landlord. This not only affects what the buyer is going to inherit, but it could also affect how much the seller has to pay at the time of the sale. Believe it or not, there are some landlords which put special clauses in their lease agreements which entitle them to a percentage of the total sales price when the business is sold. You certainly don’t want to have that happen because that will greatly impact the profits you get from your business. Now what the clause in the original lease agreement should state is that the landlord gets a percentage of the leasehold value and not a percentage of the sale of the business.
4. Plan for a New Lease
Commercial lease assignments are often used when the current lease has several years left on it. This makes it attractive to buyers because they don’t have to worry about being kicked out of the building by the landlord after just a few years. Since buyers are investing a lot of money into taking over the business, they want to know that they are going to be able to operate the business in the same location for a good number of years. Therefore, if the current lease doesn’t have too many years left on it, then you will have to create an entirely new lease for the buyer rather than assigning them the one you have. Creating a new lease in this situation will be the only way to make your business marketable.
The only problem you may have with creating a new lease is if your landlord doesn’t allow it. Since they hold the master lease, a seller could not create an entirely new master lease unless the old lease is voided. In this case, you could try advertising a "going out of business" sale instead of a traditional business sale. If all else fails, ask the landlord if they are willing to give the buyer an option to renew if a commercial lease assignment is generated. If buyers can see in writing that they will be able to renew the original lease after it has expired, then they won’t be so fearful about purchasing the business.
Selling Your Business: Going by FSBO vs Hiring a Broker
5. Investigate the Landlord
Do you know for sure if the landlord owns the property? It may seem like a silly thing to have to investigate your landlord’s ownership status over the property but you can never be too careful. Perhaps your landlord sold the commercial property that your business is in while the lease agreement is still active. Maybe one of their relatives actually owns the property on paper and they are just acting as the landlord. As the seller, you’ll want to make sure the person you know as the landlord is actually the owner of the property. This will help you avoid any problems later on during the sale of the business if you were to find out that the landlord on the commercial lease assignment does not own the property to begin with.
6. Timing of the Assignment
Buyers do not like to be patient. If you present a commercial lease assignment to your landlord and they do not approve it right away, then your buyer might not want to wait any longer and will likely walk away from the deal. Check to see if the original lease agreement has an assignment clause which specifies how long the landlord has to approve a lease assignment. Many lease agreements might state that they have 30 or 60 days to approve it. However, you’ll want to try and get your landlord to approve the lease assignment within 15 days. Any longer and the buyer might not think the deal will ever get made.
7. Approving the Purchaser
When you sell a business with a lease, it is imperative that you conduct a background check and a financial check on the purchaser. Even if you weren’t selling it with a lease, you’d still need to make sure that your purchaser has the financial capability of paying the purchase price or at least be able to make payments on it. But since you are selling your business with a lease, it is even more crucial that you know your purchaser has the means of honoring the commercial lease assignment. Not only is this important for you as the seller, but it is important for your landlord as well. They are going to want to see the financial information of your buyer before they approve the lease assignment. You need to have this information available to give to them because they aren’t going to conduct the credit and financial check on your buyer. That is the responsibility of the seller, which is you. Some landlords will also want to know if the buyer has experience running a business. They don’t want to approve a lease assignment for a buyer who might make the business go bankrupt in six months because they don’t know how to run it. So, try to find good buyers with financial information that will impress the landlord.
8. Use a Business Broker
If this is the first time that you’re selling a business with a lease, it is always better to use a business broker to help you out. Sure, they may ask for a small percentage of the sale price, but at least you will get familiar with this type of sale. The business broker may even be cheaper than an attorney in certain situations where negotiating and litigation is necessary. The broker will work with your landlord and purchaser to find common ground and to try and get both parties on board with the agreement. Most importantly, the broker will review the current lease agreement that you have with the landlord and go over what you will get and what you will lose if the sale were to take place with a commercial lease agreement for the buyer.
9. Processing Fees
States all have different laws surrounding the processing fees associated with commercial lease assignments. Some states won’t charge anything while others may charge as much as $2,500. Typically, the processing fee will be between $500 and $1,000. This fee is to be paid by the seller since they are the ones in charge of the assignment transfer in the first place. A fee in this price range might seem like a lot, but it is really not that much when you consider the many thousands of dollars they are going to be paid for their business. Plus, the landlord will have to do a lot of the paperwork for the commercial lease assignment and they aren’t even the ones making any money on the deal. That is why sellers usually don’t have any problem paying the fee. If you do have a problem paying it, you could always negotiate this with the buyer and see if they will split the processing fee. Most buyers will expect there to be additional fees on top of the sale price anyway.
10. Security Deposit
When it comes to the seller’s original security deposit that they paid to the landlord, there is a way for them to get it back. First, the landlord is going to keep the initial security deposit once they are notified of the sale between the seller and the buyer. Then what happens is the seller asks the buyer for a security deposit before the sale of the business is complete. This makes it easier on the landlord because they don’t have to go through the trouble of giving back the security deposit to the seller and then collecting another security deposit from the buyer. Remember you want to make things as easy and pleasant for the landlord as you can. After all, they are the ones who can cause trouble for your sale if they are not happy.