Commercial Lease Assignment When Selling Your Business: 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.
As part of selling your business, the lease can be one of the most overlooked barriers to completing the deal.
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 Isaacs, CBI, ABI
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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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?
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?
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
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.
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