Commercial Lease Assignment Problems
As part of selling your business, the lease can be one of the most overlooked barriers to completing the deal. The buyer and seller may have a “meeting of the minds” when it comes to the lease, but if it isn’t assigned they have nothing to buy or sell.
Let’s explore a few of the common issues that come up related to a lease in the sale of a small business.
Inadequate Time Remaining on the Lease
Ideally a tenant should sell a small business with more than three years left on the lease. The takeaway here is the longer the better.
It’s not uncommon for me to meet a seller who is going “month-to-month” on a lease and proud of it. In their mind they’ve reduced their commitment to the business, but in the buyer’s mind one of the largest expenses of the business is unsecured and at risk of inflation. The buyer’s ideal scenario is a monthly rent price that is known and set into infinity, and for this reason many buyers ask if there is an option to buy the real estate.
When sellers go month to month, the lease negotiation with the landlord is shifted further towards the advantage of the landlord/property management firm.
Landlord Approval is often a Condition to Close in Asset Purchase Agreements
When a business is sold the buyer must be approved by the landlord to be granted an assignment or a new lease. The seller normally only cares if the buyer has the funds to pay for the business, but the landlord doesn’t want the buyer “squeaking in” with nothing left in the bank account, or even worse bringing debt into business.
Landlords want to see reserves for a buyer to be able to pay the rent for up to six months, and they will ask for a “PFS” or personal financial statement to judge the rent worthiness of a tenant. Much like an SBA loan, they may also want to see some experience from the tenant that’s relevant to the business they are buying.
While the landlord can’t tell an owner how to run a business if they pay the rent and follow the rules of the lease, they can make it difficult to get in.
Assignment Fees From a Landlord may be Excessive
It’s not uncommon for a landlord or property management group to ask to see the contract for the sale of the business before considering a new tenant. They do this because they want to know how much the seller will make when they sell the business, and they may want a piece of the action. This is called an assignment fee.
For the right to transfer a lease, or what is often justified as “attorney’s fees,” an assignment fee is demanded to release the current tenant from their obligations. The fee is normally between $2K-$5K, but in one case I’ve seen a landlord ask for 10% of the contract price, which was $33,000. Assignment fees are negotiable, and a good broker and/or business attorney can assist a seller in negotiating this amount.
It also highlights the value of having a good relationship with the landlord.
Security Deposits on Commercial Lease Assignment may be Necessary
While the assignment is typically the responsibility of the seller, the landlord can and will also ask for a security deposit from the buyer. A reasonable security deposit is one month’s rent, but this too is subject to negotiation. I’ve seen up to six months requested, and again it’s highly negotiable. Both the term and how long it’s held can be negotiated.
While the seller of the business may think this isn’t his or her problem, it can be a problem if the security deposit makes the acquisition prohibitive for the buyer.
Landlords may ask for longer term security deposits as a deterrent to acquiring the space if they’re not trusting of buyers. Having a strong personal financial statement and experience to run the business is the best defense against an unreasonable security deposit.
Assignment Conditions may Surprise Everyone
Just when you think it couldn’t get any worse, there’s more. Landlord’s often don’t like letting the original tenant off the hook. If a seller gets his or her lease assigned, the landlord will most likely insist that the seller stays on the lease as back up in case the buyer doesn’t pay the rent.
Why have one “throat to choke” when you can have two?
The best defense here for a seller is to negotiate the removal of a personal guarantee when renewing a lease years before selling the business. If the business is strong and long lived, and the landlord likes you, renewing for a long term but removing your personal obligations will best position you to exit your business without the associated liabilities attached.
Conclusions
Some things like the “month to month” phenomenon of sellers are counter-intuitive. A final example are below market rents. While below market rents can be great for a seller for cash flow, it’s all the more reason to expect a landlord to “correct” the rent when a new tenant arrives. Market rates are what you want to be paying to avoid any unpleasant surprises when it’s time to sell the business.
When it comes to leases, the landlord has most of the cards. Even when neighboring spaces are unrented, landlords see a small business sale as their opportunity to make some money and adjust market prices to current levels.
Here again we see the difference in the renter versus owner perspective; the renter thinks “they need my business because these other units are unrented, so I’m going to get a great price” while the landlord thinks “this tenant needs to pay market rate or higher because these other units are unrented.”
Neal’s strengths include matching buyers and sellers, pricing businesses, and negotiating deals.
He is an MBA, CBI, ABI and serves on the boards of the Carolina Virginia Business Brokers Association (CVBBA) and the Better Business Bureau of Eastern NC. He’s lived in Garner for 15+ years and is an active member of the Garner Chamber of Commerce. He enjoys cycling and spending time with his wife Vivian.
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So i’m looking at a lease for a retail location and the “assignment fee” is 50% (!!!!) of the sale.
It’s a relatively high profile shopping center, but I will definitely negotiate this. Thanks for the info 🙂
James,
Thanks for your question. Yes, that is outside of normal for the range I have seen. Pre-negotiating that before you sign will pay dividends if/when you need to assign, and improve your options for exit.
Andrew,
Apologies for the delayed response, your landlord appears to be onerous on terms and conditions for the transition of your lease. It sounds like a bank is involved as well, which complicates things. Hopefully you have an attorney helping you put this deal together, I would advise you to involve an attorney in your negotiations; it can help in complicated situations like you are in.
Jolie,
The landlord’s position is the default, holding onto the original tenant’s personal guarantee. That was a promise to fulfill the rent obligations outside of your corporation when you signed your original lease. You used the correct term; negotiation. Anything can be agreed too. To answer your question, outside of stressing the financial strength, qualifications, & experience of the replacement tenant you are offering to replace you, it will probably come down to money. You could offer to pay to get out of that obligation, for example. It sounds like your landlord has asked for personal property as collateral, this could be negotiated as well. Offer something that already has a lien so his is a second. Keep in mind that landlords don’t want to go and chase back up payment options, so your PG is more of a safety net for him/her. This is a hassle for you and your landlord, and the exercise is purely to manage risk. The more confident your landlord is in your replacement tenant, the less he/she will look to you as a backup.
I hope this is helpful!
I am the owner of the building, my tenant own the news papers business and sold the business to the new owner I am the lanlord and owner of the building never know. After I heard rumo from neighbor I go to the business to ask to meet the new owner but I have no luck, I have to stop by at the office and leave my message to the reception and reach out to him by phone many times but no luck.
After more than 3 months 6/10/20 first time I did see him and step up to him ask him for sign the lease and the lease will iincrease due to my intend to repaint and do some upgrade to the place and welcome him at a new tenant in person. As much I just say he have to sign the lease and rent will increase, he told me he will move out by 8/1/2020. I send him letter with certifite mail and service by in person to leave my building in 20 days, also I ask him to fill out application credit from him and his partner, also asking for the keys and not trespassing my place which is he did and moving stuff belong to my builidng with out asking me. Please advise how can I handle this matter.
Greetings Kim,
This is an unusual situation indeed!
My opinion as a business broker is that as the land owner you have rights to the use of your property, and the relationship between you and your tenants should be defined by a valid lease agreement to the specific parties (person and businesses) utilizing your space.
I’m not an attorney, and I would recommend you talk to a real estate attorney regarding this, but it does sound like the new owner of the business in your space is not cooperating; they may also be a liability to you. As you’ve already made numerous attempts to communicate with them directly to no avail, I highly recommend you enlist a qualified attorney to contact them on your behalf.
Can a landlord raise the rent at fair market value at the time when the tenant
wants to assign the the lease to new buyer.
Greetings Pritpal,
This is more of a legal question so I would advise you to consult a real estate attorney, but as a business broker I would say that if the lease is being assigned, the landlord, or lessor, is merely transferring the existing rights and terms in the original lease from one tenant to another, including the rental rate.
If the tenant agreed to an amendment or requested changes to the terms, such as an extension, that may be a valid opportunity to address the rental rate. I hope this helps!
I am looking to sell my business for 4.5 times EBITDA, value $2.5 million.
After several back and forth negotiations, the buyer has offered $2.425, which is much less than the valuation, but also wants to include the lease security deposit of $12,300 as part of the $2.425 offer. Any thoughts you could provide would be appreciated.
Hey Michele,
Congrats on reaching an offer exchange stage in the negotiation of the sale of your business.
Assuming it’s an asset sale, that security deposit is an asset of your business, and it shouldn’t be considered a buyer credit in a traditional closing. It sounds like that’s what your purchaser is advocating for. Effectively your buyer is you offering $2.4127, not $2.425. Items such as lease deposits, pro-rations for rent paid, pre-paid advertising, and more all should be accounted for on a closing statement, and the purchase price should remain what you agreed upon.
My suggestion would be to ensure that the buyer has clarity on the reconciliation of the lease and other adjustments that will need to be made at closing, and ask the closing attorney to help with this discussion.
Hi Michele,
As a business broker, a few questions come to mind. Is the buyer challenging your valuation with specific reasons as to why they think the business is not worth $2.5 MM? How did you determine the value of your business? Was the value determined by you, a business appraiser or some other third party?
The best way to counter a sale price objection(s) is to address their specific objections and make sure they understand how the $2.5 million value was determined. If you can show the value was determined based on industry data and a valuation performed by a third party expert such as a business appraiser, this could help you get your $2.5 MM sale price.
I hope this helps.
My lease has almost expired. But I sold my business my questions is what kind of letter do I write to the landlord? he said extension lease but what about renewal lease? which one is better. I live in California. Thank you!
Hi Margaret,
If you’ve sold your business already, it’s important that you review the lease language to determine if the lease may be assigned to a new owner.
If you sold the assets (and not the business entity), you may be in violation of your lease agreement.
If you sold the business entity, you still may have needed to obtain the landlord’s permission to assign the lease.
It’s not my intention to alarm you… just want to point you in the right direction. Take a look at what the lease says about “Lease Assignment”.
If you need legal assistance, you may request that here.
All the best…
Hello I am in the process of purchasing a business the landlord denied my application with no reason. The current owner of the business just made an offer to the landlord to be my guarantor. I was an employee for this business and I really want to run the business. I am scared the landlord might deny me again. Can the business be sold without notifying the landlord. I have the money I don’t know what is making him deny me. I had a bankruptcy back in 2012. Can this be the reason why?
Hi Araceli,
I am sorry you are having such difficulty with the landlord!
The Landlord you are dealing with may have included certain legal text or clauses in his/her commercial lease agreement with the seller which may prevent the lease from being assumed or assigned by others.
The only way to know if this is the case is to look at the lease agreement.
It could be the Landlord obtained a personal credit report on you if you gave him the information and permission to do so.
Hope this turns out well for you and the seller!
I only provided Buyer’s Personal Information. It ask for social security but no where in the form does it state my credit will be viewed. I appreciate your response.
Hi Araceli,
Hmm… You may want to ask the broker representing the business sale about the personal information form you provided to the landlord.
I’d want to know what was the information used for.
All the best…
i am taking over a business under an assignment, i have done everything, but the one doing the assignment is unreachable and now i am faced with the assignment being rescinded by the Landlord, what can be done?
Hi I just sold my bussiness my landlord has me on the lease for 30 days the buyer has not paid yet I will have to pay to get off the lease now I am worried because I did finance half of selling cost
Any help is appreciated
Thank you
Hi Robin,
I am sorry you’re having trouble with the buyer.
It sounds as if your sale has occurred recently. I’d reach out to your attorney and business broker to discuss the matter to see what recourse you may have.
All the best…
We are in the process of selling our restaurant and handing over our leftover lease to the new buyer. The landlord is stating that if the new tenant does not pay the rent then we are responsible for it. Can you please advise? We are located in GA.
Greetings Max,
Congrats on the sale of your restaurant.
As a business broker I can’t give you legal advice and this will come down to the legal contract that is your lease, but from my experience your landlord most likely had you sign a personal guarantee and plans to release your business from the lease obligations but keep you on the hook as a “back up” through this personal guarantee, if the new tenant doesn’t pay.
This is the de facto positioning of most landlords, and it’s very challenging to get around. Sorry to be the bearer of bad news Max, but hopefully your restaurant buyer will do great and you won’t be bothered with this.
Neal Isaacs
Hello Max,
I am a Business Broker in GA and have been involved in transactions in the food service industry and other industries in which the seller’s lease is assigned to the buyer. In a lease assignment, the seller is responsible for the rent if the buyer fails to pay rent. However, in this type of transaction, it has been my experience that the seller’s attorney has added indemnification language in the business sale contract that addresses this issue to the satisfaction of the seller. And just as important, the buyer is qualified and there does not appear to be a reason to be concerned that the buyer might fail in the business or fail to pay rent. You should consult with your attorney on this issue.
I hope this helps.
Greg Younts
I am going through this now (in IL). The new buyer is late on payments and has handed over his keys to the landlord. Unfortunately for us it seems that we are now liable once again… My mom is retired and not nearly making enough money to cover the costs.
I’m wondering to what extent the landlord with go to getting payment from the new buyer before coming to us? The lease doesn’t expire until 2022 so this is a huge concern and a very large amount of money to be had.
I’ll appreciate ANY guidance here. Thank you!
Hi Samantha,
I am very sorry your family is dealing with this unfortunate situation.
It’s difficult to predict whether the landlord will pursue your mom for the unpaid rent payments and if so to what degree.
The new lease agreement may shed some light on when the seller will be held responsible. I agree with Greg’s reply to Max’s question in that there may be some form of indemnification in the asset purchase or stock purchase agreements that may prove useful to your mom.
It would be best to consult with the attorney who represented you in the sale of the business about this matter as soon as possible.
If you don’t have an attorney to help you with this, you may request help here.
Hope all turns out well for you and your family Samantha!
We are in the process of selling our business, one interested party decided to talk directly to the landlord to try to get the lease to our spot, which would prevent us from selling our business. We have another party that is interested in buying, so is that legal for the landlord, if they agree to the first party, to lease to them, and then prevent us from selling?
I can’t answer from a legal perspective as many of the attorneys on this site could, but from a business broker’s perspective this underscores the need to protect your space with a long term lease. Furthermore, most landlords are not interested in usurping rent paying tenants as they normally have additional costs to entice new tenants to the space that they don’t have for a renewal. Not knowing all of the variables in your situation Carson (if you’re paying market rent, what your rent payment history is…) I would say that they could do that if you don’t have a lease protecting your space but it would be surprising if they did.
In New Jersey can a landlord stop the sale on a business? I am in the process of selling my dry cleaners and have a buyer. We both have lawyers ready to close. The landlord approved it and asked for $1000 dollars for the assignment and assumption letter.
We started this process in July 2019 and advised the landlord that we are going to close November 1, 2019.
We have not heard from the landlord. Both lawyers have been emailing the landlord and he’s missing in action. Once in a while he’ll send an email saying OK he’s going to get the letter but he’s dragging his feet as if he really doesn’t want this sale to go through.
The potential buyers for the cleaners are growing impatient. Both lawyers, my lawyer and the buyers lawyer are getting upset with this landlord. He is the owner of the building and it’s as if he is trying to sabotage the deal. Didn’t know if you had some advice?
Hi Jon,
Very sorry to hear you are having these troubles with your landlord assigning the lease so you can sell your business. It’s very unfortunate and not an uncommon situation!
It sounds as if you’ve been patient with the landlord and have done what’s expected.
You may want to take a look at the lease to see if there is language regarding your rights to assign the lease. Sometimes you will find something that says “the tenant may assign the lease to a new lessee with the landlord’s consent, which shall not be unreasonably withheld.” If the last part (which shall not be unreasonably withheld) is included in your Lease Assignment clause, then your Attorney may want to consider raising the matter with the landlord.
Hoping your sale goes through! Keep us posted…
We purchased a business 6 months ago and had the previous owner’s lease reassigned to our LLC. From day one we have had all sorts of problems with the state of the building. The previous owner had failed to keep up with the maintenance on the building and we have incurred costs to fix things like a slow leak from drains that had not been cleaned causing decaying drywall and the rear door frame to become so mishapen the door would no longer close. The business is a restaurant and the previous owner failed to have the grease traps regularly cleaned causing more plumbing issues and a stench you wouldn’t believe. They stopped paying for pest control causing a rat infestation that cost thousands to get rid of. The water heater and air conditioning went out within a 60 days. We had to close our kitchen for over a month after I became ill and was in ICU with e-coli I assume was contracted from the kitchen. This has cost us tens of thousands in lost revenue plus the costs of the repairs we’ve already done and were just informed our electrical is not up to code and will cost $10k+ to fix. Our lease indicates the tenants is responsible for all repairs sans the roof and exterior walls. Do we have any legal options to go after the previous owner for the state of the building? It is clear that, as we were in negotiations for over a year, towards the end of the sale he just stopped doing any repairs or regular maintenance. Are we stuck with the bill for this?
Hey Delana,
Sorry to hear that you’ve had such a challenge with this transition.
As I’m a business broker, not an attorney, I can’t give you legal advice, but what I can do is direct you to the purchase agreement you signed when you sold your business, which is effectively the instructions for the deal.
Usually there is a provision that states that the seller will run the business as they normally would while the business is under contract. If you’re looking for a “breach” to hold the seller accountable, this could be a good place to focus your attention. I would also go back to the attorney who represented you in this transaction, as he/she would have the most intimate knowledge of this deal, or look for help with one of the attorneys here on Exit Promise.
Best of luck to you Delana!
I’m closing my business but selling all of the equipments to the new company which is owned by my current business partner. The lease agreement is one-year lease, personal-guaranteed by My and my business partner. How do I get my personal-guarantor off the contract? Thank you
Hi Thomas – Assuming you don’t want to wait a year for the lease to expire, you have a few different options.
You could request that the landlord release your guarantee. It’s possible they will want to be compensated in order to release you.
You could ask your partner to indemnify you, but that would only mean that your partner is liable to you….it wouldn’t require the landlord to honor it.
Good luck!
I have sold my restaurant and the new owners are renting the building , we signed a promise to buy the building , I would like to retract and not sell it to them …. for various reasons . My question is can I retract the promise to buy and keep my building ?
Hi Karen,
I am not certain what you mean by you “signed a promise” to buy the building.
If you’ve signed a ‘contract’ or ‘purchase agreement’ to sell the building to the buyers of your business, if you don’t do so it’s likely you will breach the contract or agreement if you back out of it.
Again, you’ve said it was a ‘promise’, which I don’t understand what you mean by that.
Could you clarify?
Promise to buy is a preliminary document signed by the seller and buyer . I signed the document last year on 15 October 2018 and normal the buyer will buy the building on the 14 October 2020 , but he has been a tenant for 1 year and the problems I have encountered are unbearable as I live next door to the prospective building
I desperately would like to retract out of the deal .
Hi Karen,
Thank you for the clarifications.
My recommendation would to be for you to seek legal counsel if you’d like to resolve the problem.
You may have something (a clause or condition) in your agreement that would help you.
Here’s where you may request further assistance.
All the best…
I purchased a Buisness in 11/30/19. I along with the seller and an attorney signed a lease reassignment. I gave the seller a deposit check. The property was sold in Jan 19, the lease expires in 1/20, the new owner notified me the reassignment was never signed by previous owner. What are my options? Am I responsible for lease still? Can I move ?
Hey Ted,
I’m assuming you meant you purchased it on 11/30/18. Also there is a lot of information missing to answer your question. Do you want to move? Is your business location dependent? You mentioned a deposit check but did the the business transaction (not the commercial real estate transaction) close yet?
With the information I have, my thoughts are that most landlords are happy to have a tenant, so they should be open to working with you on completing the assignment. If you do want to move, my broker’s opinion is that you don’t have a binding obligation if a principal’s signature is missing. But I am not an attorney and can’t give you legal advice. I would encourage you to seek a real estate attorney’s opinion on your options.
Lastly, if you do want to stay I would highly recommend a lease extension on similar terms as 1/20 is right around the corner…
Hey Andrew,
Sorry to hear this transaction has been a burden. It sounds like you’ve provided the landlord with a lot of what he/she is looking for. I don’t completely understand your predicament from how you’ve described it, but my advice as a broker is to get as many parties as possible into a room to have a face to face conversation. When people put up obstacles such as large deposits or multiple personal guarantees it’s usually based in a lack of trust, and trust can be built with this type of meeting. I get the best results with this strategy, even though it takes time and people like to hide behind computers. If this doesn’t work, or in combination with this, legal representation is your best bet. Hope this helps.
hey I tried to sell my pizza shop but landlord he doesn’t want to approve new buyer I have 9 years left in my lease he has good credit financial statement he owned a company I can stay there because I lost a lot of money. please I need help
Hi Jilali,
You may want to ask the Landlord why the buyer was not approved to take over your lease.
Most lease assignment clauses state something along the lines that the approval of the lease assignment won’t be unreasonably withheld. If so, the Landlord should be willing to tell you why your prospective buyer is not acceptable.
Hope this helps you a bit…
I’m selling my business and everything has been agree to. The landlord has asked for more then 10k as a deposit and has agreed to extend my 3.5 years to an extra 1.5 years with a 5 year option. They also have 5 personal guarantors from the new buyers worth over 6 million dollars. They insist on keeping me on the lease for 12 months. The process started over 70 days ago and we reached full agreement 8 days ago. The lender is asking for the lease but the landlord is dragging their feet. My lease says that they have 60 days to submit a new lease if everything was agreed on. What can I do to get them to write the lease and send it to us? We have made many attempts, email, text and phone calls with no response. Thank You
I purchased my restaurant on Dec 2018, the previous owner agreed to the landlord to be our guarantor until the lease was renewed on Sep 2019. Now we want to sell our business, do we have to be the guarantor for the buyer until the lease is up (4 1/2 years)? What are our options to negotiate with the landlord to not use our personal properties as guarantee?
Also, what is the best approach to get the landlord to approve the new buyer?