Neal had earned his MBA, holds CBI and ABI designations and serves on the boards of the Carolina Virginia Business Brokers Association (CVBBA) and the Better Business Bureau of Eastern NC.
- How To Choose A Business Broker Intermediary - January 25, 2023
- Buying and Selling a Business in a Changing Market - July 22, 2022
- How to Add Value to Your Business - January 18, 2022
Do you have a Question?
Ask below. One of our Investors or Advisors will Answer!
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.”
I have an offer to buy my business. The landlord refuses to allow the lease exchange because he does not want to. Even though the lease states it can be transferred with the landlords written consent. I live in Pierce county WA. It was my understanding that the landlord could not unreasonably withhold written consent
Hi,
I bought the business 3years ago. And my lease donot allow me to sublet.
But insted of subletting can i sale my s corporation?
Hi Darshi,
You can always sell your S Corporation to a new owner.
That said, your lease may also state that any new owner of the S Corporation must be approved by the landlord.
You want to look in your lease for clauses regarding Assignments and Business Sale Landlord Consent in addition to Subletting.
All the best…
Hi Randall,
I am sorry you are having difficulties getting your landlord’s cooperation as you sell your business.
Many times a lease will say something such as “the lease may be assigned with the landlord’s consent, which shall not be unreasonably withheld.” That last clause is important as the tenant can argue the landlord’s unreasonable withholding of the lease assignment to the business buyer is contrary to the lease agreement.
If your lease doesn’t include that clause, it’s a more difficult situation because the tenant truly has the balance of power whether he/she wants to be cooperative.
If that’s the case, I’d be willing to bet the landlord is trying to figure out how much you want to sell the business and whether he can extract an assignment ‘fee’ for his cooperation.
I know that really stinks. However, I’ve seen this scenario play out many times.
Let us know how things turn out!
Hi. I have a 3 year lease with 18 months left and an option to renew for a further 3 years. I am selling my business and will assign the lease to the new owner with landlord’s permission. If new owner defaults, I will be on the hook for the rent – that’s the wording of the lease. My question is if the new owner elects to extend for a further 3 years on the option, will I still be on the hook – and if so how to get out of this?
Thanks
Hey David,
Congrats on the sale of your business.
Keeping the original tenant on the lease as a backup is fairly customary from a landlord’s perspective in a lease assignment, but if your buyer chooses to extend his/her lease beyond what’s left of your term, you shouldn’t be held accountable for that time. Even though that’s a smart move on your buyer’s part, you should not be contractually obligated to that responsibility.
These are practical considerations from my experience but as a business broker I always advise that a seller consults a real estate attorney licensed to review and advise clients on real estate contracts.
I am trying to close on the purchase of an existing business. The landlord has agreed to assign the lease, and I have signed the lease assignment, as has the seller. I have even paid the deposit and first month’s rent to the landlord, per the lease assignment.
However the landlord is outright refusing to sign the lease assignment until after the lender funds the purchase and escrow closes (even though the landlord said in email they would execute the assignment as soon as they received my deposit and rent). Of course, the SBA lender will not fund and escrow cannot close without an executed lease assignment. The landlord is not negotiating further. What can I do? They have my money but are obstructing the close of escrow.
Hi Jr,
I am sorry you are having these difficulties with your landlord.
You may think about asking your landlord if he’d consider signing the lease assignment agreement if it is contingent upon the lender funding, escrow & closing occurs. If the sale of the business does not happen, then the lease assignment would be null and void.
In other words, he/she may be concerned that if the assignment is fully executed in advance of the closing and for some reason the closing doesn’t happen, he’s got a lease with someone other that you.
A simultaneous closing and assignment of the lease would solve the problem.
Let us know how this turns out for you!
All the best…
We have sold our business including a Deed that we no longer have a lease, however, the Landlord will not return our security deposit. The new owner has provided them with a security deposit however the Landlord has changed their mind as to the wording of the security and will not release ours until the new owner provides another new security deposit. The new owner and the Landlord are at an impasse. We are caught in the middle. Can the Landlord hold our security deposit even though they have another one with the new owner?
Hi Lauren,
I am sorry to hear you are having troubles.
Whether your former landlord can hold onto your security deposit will likely depend on the terms defined in your original lease agreement.
Take a good look at the lease agreement and definitely discuss the matter with your attorney.
If you need further assistance, here’s where you may request help.
All the best…
My commercial tenant of 14 years has 1 1/2 years left on their lease with two five year extensions if desired. The new buyer of their business wants to close this week, I the landlord am holding all the cards, but not sure what the right move is. The original tenants were nothing but the best anyone could ask for, I know very little background of the prospective tenants, the wife has all the credentials, house, waitress experience , the husband does not speak english and I’m not getting his experience as a chef. The potential new tenants have just created an LLC, my question is: do I allow the current tenant to sublet as I would have to give permission, keeping them on the hook for 18 months, or do I take my chances with new tenants being able to stay a float, also have them sign personally and professionally? Not sure if the LLC would be an issue? Also, I will be selling my property and do not want any liens from long lease holders.
Hi Donna,
Well, it’s great that your existing tenant has been the best you could as for!
Unfortunately, I am not able to tell you what you should do in this situation.
If the sublet option is on the table and your current tenants are upstanding and would stand behind the lease if not paid by their buyer, then you’d have nothing less financially than if the current tenant stayed.
That may give you enough time to decide if you want to extend the lease with the new owners beyond 18 months. Agreeing at this point to give them another two, five year extensions may be premature.
Hope this helps a bit…
Hello from Paris, France.
In the past months, I have been negotiating to buy a small business in California through an E2 investor visa.
I have agreed to financial terms with the seller and we both talked to the landlord who agreed to consider me taking over the lease after proving myself financially capable (sending my bank statements with proof of funds), talking to him via FaceTime so that he could “know” me, etc…
The lease is currently on month to month, and he asked me to deposit 3 months plus 3 months upfront rent (so total 6 months), I agreed. He said he would do a 6 months lease, I asked him to consider at least a one year lease renewable (as I don’t want to buy a business and be in a position where he can evict me as soon as he wants, and therefore lose all my money and place of business with employees) and he said he would consider it and get back to us (seller and buyer).
Now many months later he comes back to me saying that for personal reasons he doesn’t want to commit to a long term lease (meaning he wants to stay on a month to month).
It is obviously a huge problem as it would kill the deal, and even for an american buyer i don’t see how someone will put a large amount of money with no security on the lease. What are your thoughts ? Is it possible for the seller to sue him as he will never sell under these circumstances ? What would be our best move (buyer and seller) ? I am still very motivated to buy this business…Thank you !
Dimitri
Hi Dimitri,
The situation you and the business seller finds yourselves in is very unfortunate and not all that unusual. In my experience, navigating the lease assignment can be problematic.
If I were advising your seller prior to placing the business on the market for sale, I’d strongly recommend addressing the month-to-month lease without informing the landlord about his desire to sell the business. Taking this simple step is basic exit planning and would reduce the risk that the landlord may ultimately control the deal.
Having a lease for one-to-five years makes buyers like you comfortable. It’s also important that the lease assignment be addressed in the lease! Many leases are silent on this subject.
With a month-to-month lease, it’s not necessarily impossible to sell the business. There are buyers out there who do not understand this risk. Clearly, you are not one of them.
Your seller will have to address with his legal counsel whether filing a lawsuit against the landlord makes good sense. As for me, I am not a big fan of resolving problems via lawsuits.
Instead, you may want to try to find out what the real reason is for this landlord’s reluctance to extend a lease term to you beyond the end of this month. If you can understand where he’s coming from, there may be a better way to overcome this obstacle.
And if that strategy fails, your seller’s lease ends at the end of the month. Would it be possible to lease space nearby so you don’t lose the employees? This alternative comes with additional costs of course. That said, it solves the problem. Ironically, the landlord would have no tenant and have to find someone else to fill the space.
Hope this helps a bit…
My tenant has sold his business and now he wants to assign the lease to a very rude and impolite person who likes to intimidate . I am wondering what are my rights as a landlord .
Hi Sue,
The first place you should look is at your commercial lease agreement.
Whether your tenant has the right to assign the lease to another party or sell the business (with or without your permission) is normally addressed in the agreement.
Then you should address the matter with your business attorney before you take the next steps.
All the best…
I sold my hair salon and the buyer will not pay the final payment of $30.000 , he is offering me $12.000. Is this legal?
We do have a contract. He’s saying I broke the contract by leaving earlier than the end date, while I was told to leave.
And not to mention when my clients would call for me they told them I’m no longer there, when I was still there.
He’s also claiming I broke the non competitive agreement by working at home. Let me make this clear. I do not work at home and never did. He thinks he has me over a barrel. I live in NJ.
Hi Kim,
I am sorry you are having these challenges collecting your final purchase payment from the sale of your business.
It seems to me that your buyer is trying to negotiate the final payment by offering you less than what the contract indicates he owes you.
Based on what you’ve described, it appears your buyer is claiming you’ve breached the purchase agreement (contract). If the buyer is not paying you the full final payment and there is no provisions in the agreement for him to reduce the payments, it would appear he may be breaching the contract.
If you had an attorney representing you when the purchase agreement was negotiated and drafted, you should address this with him/her immediately.
If not and you’d like to speak to an attorney in New Jersey who is well-versed in this type of issue, you may request assistance here.
Truly hope all works out well for you Kim…
In several instances, I see the advice to see if you can get out of a personal guarantee in regards to the assignment.
What if you are an LLC and your landlord’s property managers won’t remove your name but rather use it DBA the LLC?
The language in the Assignment section of the lease says “may not be assigned… without prior written consent of the Landlord, which shall not be unreasonably withheld.”
We have a great relationship with the landlord, but the property managers are unwilling to remove my personal name with the LLC.
Also, can you tell me, in regards to option for renewal, if it says “shall be subject to this agreement, excepting provisions as to term and base monthly rent.” does this mean at the same rate as the current lease unless someone proposes a change or does it mean that the renewal is a new negotiation for rate?
Thank you for the clarification Lloyd.
If your individual name is identified in the lease as the lessee, then whatever the lease requires it means you (as an individual) must comply.
So having your LLC identified as the lessee is very important. And yes, as the managing member of the LLC, you would sign the lease.
There’s no such thing as an individual DBA (doing business as) an LLC. Your business entity is an LLC and it is the party that should be identified in the lease as the lessee!
Your property manager knows this and it’s the reason he’s had you identified in the lease as the lessee. This tactic keeps you on the hook for the lease terms and not your business entity, the LLC.
If you haven’t signed the agreement yet, you may want to think twice about doing so.
The first clause regarding the lease assignment you mentioned is very common. If you were to sell your business before the end of the lease term, you’d be required to ask your Landlord for his/her permission to assign the remainder of the lease to the new buyer. The part “which should not be unreasonable withheld” is somewhat helpful to you and a buyer as the Landlord would have to be reasonable when considering the assignment.
That said, I can recall many cases where the landlord’s definition of reasonable vs. our client’s definition differ greatly!
The second clause regarding renewal options means the entire agreement may be renewed under the existing terms, EXCEPT the length of the agreement (the term) and the amount of base monthly rent. In other words, the Landlord will renegotiate the new term length and rent payable when you renew.
You may want to negotiate a minimum renewal term and maximum rent increase so the renewal clause has some value to you. Otherwise, you are starting over when your lease term expires.
Hope this helps a bit.
You should carefully consider your lease agreement with legal council before you sign it as most leases have long-term implications. If you don’t have an attorney to help you, feel free to request one here.
All the best…
Sure, the property managers are using my personal name, doing business as my LLC name in the lease. I wanted it to be between my LLC and the landlord, only having my personal name in the lease on the line to sign at the end as the LLC manager. But they insist that my personal name has to be at the top of the lease as who the agreement is with.
Hi Lloyd,
I am sorry Lloyd, I do not understand your question. The part about “rather use it DBA the LLC?”
Could you clarify please?
I am selling my small business effective June 1, 2019. My lease is also expired effective June 1, 2019. Do I still assign the lease or is it just a new lease to the buyer? Of course the landlord is asking for assignment fees.
Hi Carol – If your lease will have expired, it’s unclear to me why it would need an assignment if there is no overlap between your lease and the new lease. The only thing I can think of is that if your lease expires at midnight on 11;59pm on June 1, 2019, and the buyer takes possession at 12:01am on that date, technically it does overlap. Either way, it seems very nit picky.
With that said, your buyer will want to have a lease locked down if they are going to purchase your business, otherwise it could jeopardize your sale. It’s possible that your landlord realizes this, and is trying to leverage it into some sort of fee.
If I were in your position, I’d go back to the landlord and state that you have someone that want to take the space once your lease upon the expiration of your lease, so you don’t understand why they are asking for an assignment fee.
If they insist on the assignment fee, you then need to weigh the cost of the assignment against how much you are clearing from the sale. If it still makes sense to pay a fee, you may want to bite the bullet to ensure the sale can be consummated.
If you do end up paying the fee, you could also try to pass that along to your buyer, or at least try to get them to split the fee with you.
Hello Karol,
I’m a business broker, not a real estate attorney, but that sounds like a new lease to me as you have completed your lease term. A new lease shouldn’t come with an assignment fee or hold you liable if it’s written for a new tenant, but it may also come with new terms.