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.
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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 purchased a franchise 6 mos ago and will admit I was naive. The seller took the sale money, gave me copy of her lease and stated that it was just a matter of signing an updated policy. I have since learned that a previous sale fell through and at that time the landlord told the owner every detail of what would have to be done including “the assignment being approved by landlord PRIOR to sale.” It also outlined that the $5000 transfer fee was the seller’s responsibility…she told me I had to pay it. I took retirement funds out to finance a business that COVID is slowly killing, and I can’t get an EIDL lone because I don’t have the previous 2 years of financials (and I know she won’t give them to me). I feel like I should get my money back for the sale, nevermind the reassignment.
Sarah….
You are learning an expensive lesson…hiring an attorney BEFORE you make a large purchase costs a lot less than having to hire an attorney AFTER the sale. Our only advice today—-hire a good attorney. Your “feelings” are not part of, and never should be part of, a business deal. The law determines whether or not you can get your money back.
I have sold my small business but my landlords are giving me a hard time with the conditions imposed and my lease ends in 10 days. The landlords want me as the seller to provide a personal guarantee for 6 months on behalf of buyer. Can landlord do this?
Joy, see Randall’s response to the last question, he’s 100% correct; for you or your landlord. To directly answer your question, it’s common for the landlord to hold you to the personal guarantee that you’ve already signed, but I’ve not seen them add a new one after an assignment or new lease…
My lease has ended signing a new lease, landlord is proposing a 7 year lease and allowing us to sell the business after 5years but holding us responsible for the 2years remaining on the lease if the new tenant does not pay,can I request an agreement on the lease to state once I have sold the business I am not responsible for those 2 years remaining of the 7 year lease
Greetings Ss,
It sounds like you are negotiating the lease and you know what success is for you. This is great! Although you might have had more negotiation power before your lease had expired, you still have a chance to get what you want. In negotiation, you can ask for anything, and it’s important to understand what the party you are negotiating with is seeking. You are wise to try to negotiate against being responsible for time on the lease after you have sold your business. You can ask for this, and you will find out how much your landlord wants you to renew your lease! They have options including asking for an assignment fee for this option, raising your rent, and more… Start the conversation and consider seeking council from a real estate attorney. Best of luck!
S s: You get what you negotiate for. Not a penny more. There is no right or wrong here. There are no laws requiring any such language in your lease.
We put an offer for a business which the sellers took but the landlord declined us without any explanation. We can’t reach them and they refuse to talk to us. We don’t know why they never contacted us even for more information from us.
Is that right?we just would like to know what happened.
Sorry to hear this Elizabeth,
If you have an intermediary or a business attorney, ask them to contact the landlord on your behalf.
I would also encourage the seller to help you communicate with the landlord as it’s in his/her best interest.
If the lease includes the language “Cannot Be Unreasonably Withheld,” as they often do, then the landlord is compelled to entertain you as a lease assignee.
If the lease has expired it may be they’ve already selected a new tenant, and the seller didn’t protect the space with a long term lease.
Best of luck to you.
Thank you so much for your answer.
I sold a business with 10 months left on the lease. The current owner is not paying the rent. I have offered to work for free, open the store which she has not opened in over 30 days to protect my interest on the lease for which I am still there. I have recently found out that she has frauded me with an alarm company by putting my name on it as well. What rights do I have to walk back into the business and take it over?
Hey Jd,
Sorry to hear things are unfolding this way.
The answer to your rights regarding the business will be the same answer Holly gave to the last question, look to the APA or SPA.
The rights to the space will be in the lease/lease assignment.
Regarding the potential of fraud, that may go beyond these contracts. Consult a qualified attorney to address these important matters.
I hope things will improve.
I am selling my franchise with a 7 years left on my triple net lease, with me as personal guarantor, if the buyer defualts on the paymnetss, do i as the seller and guarantor reposess the busineess. Please advise thaks
Hi Kalpesh,
Your right to repossess the business should be spelled out as a remedy if your buyer defaults in your SPA (stock purchase agreement) or APA (asset purchase agreement). It’s not an automatic right for you as the seller.
Good luck with the sale of your business!
I have just signed a nine year assignment of lease for a small business am I able to sell in the future?
Hey Tom,
If you mean that you took over 9 years of the remaining term of a pre-existing lease from a former tenant who assigned their lease to you, then probably you can.
Be sure to read the original lease to find the terms for assignment to the next tenant, who would be your business buyer. The assignment that you signed may or may not have details about the transferability of your lease. Normally the assignment points back to the original lease.
I hope this helps!
Hi,
I run my business from a property that is owned by my landlord. I have been trading from the property for 10 years.
I am now looking to sell the business to someone else who is planning on taking it on as it sits today. I spoke to the landlord who said that it was fine and was happy for the sale to go ahead.
I then accepted a deposit from the new buyer and began to wind my involvement down in the business and have spent a week doing so. I have also lined a new role up to start in October being employed with a company.
Today, the landlord has told me he has changed his mind and doesnt want the business to run from the property if its not myself there. Even though the new owner will literally be taking over the business and not changing anything.
The landlord has suggested that if i wanted to wind the business down he would use the space for something else, making me feel like i can never sell the business as the unit is equipt for the nature of my business. So essentially, i cannot sell this business and this will mean i am going to lose out on on significant amount of money.
Is this something the landlord can do/dictate?
Thanks
Greetings Holly,
Sorry to hear about your predicament.
This has become a popular thread for business owners and landlords with questions around the use of the space by a business in commercial property, and the answer is consistent: It depends what the lease dictates, if there is a valid lease.
From your post, you didn’t share a lot of details regarding your lease. If this was a “handshake deal,” you will be at a disadvantage as it truly is at the whim of your landlord, but if you do have a valid lease, and perhaps you have executed extensions on it, you may have some rights to use the space.
My advice would be to find the source documents for your original arrangement with the landlord, and talk with a real estate attorney regarding your options for running your business in the space. There may also be some attorneys on this site who can provide more context from a legal perspective.
Lastly, I would also try to have a face to face discussion with your landlord about what success is for him or her. Perhaps an investor wants to buy the property, or perhaps he or she is just nervous about your business buyer becoming the next tenant…
Best of luck to you.
Currently purchased a buisness without the lease in hand. Now understood this was not a good idea due to the rumor the owner could be selling the building We have been provided a price per month by the current owner but not an official lease.
We are concerned that we may have been played by both parties the seller and the landlord.
There are lots of variables to this situation but any thoughts or ideas could help. Thanks for your time.
km******@ya***.com
Kyle you are correct this could be an issue.
If the landlord is only offering month to month tenancy then chances are he/she is considering disposing of the property and doesn’t want it to be tied up contractually.
Check your purchase agreement to see if there was any language regarding access to the space that may have been violated, and try to build a relationship with your new landlord to understand his/her objectives. There may be a scenario where you could get a first right of refusal for the space in the event that it is sold and redeveloped; I’ve seen this happen.
Ultimately, unless the person who you bought your business from is in breach from the purchase agreement, he/she is out of the picture and it’s now just you and your new landlord (or their successor!) who have a business relationship moving forward.
I am planning to sell my small business. Landlord is asking some money on sale price . How much I have to pay landlord to transfer my lease to buyer . Please advise thanks
Hey Shukla,
Unless the lease specifically addresses an assignment fee, this is up for negotiation. Also relevant is how much of your lease is remaining, as the buyer could just sign a new lease if your lease has nearly expired.
This can be a barrier to sale as your business buyer probably won’t consumate your deal without access to your space, and your landlord can leverage this against you. All owners who rent can be in this prone position, especially if the lease doesn’t fully address assignments.
Either way you’ll want to bring a strong tenant and understand what the landlord’s objectives are. It could be just “wetting his/her beak” with your transaction, but it could also be concern about the tenant you are bringing.
At the end of the day your landlord wants a quality tenant who pays rent and doesn’t cause issues for the property.
Thanks for reply
In continuation to above answer, my lease assignment says “ Tenant can transfer this lease to other veterinarian or such buyers without informing the landlord “
Is that relieve me from paying the assignment fees ?
Hi Shukla,
If you don’t have to inform the landlord about transferring the lease, it’s reasonable to argue that he’s already agreed that an assignment fee is not required!
Shukla:
Sounds like the landlord wants to hop on the gravy train. Too bad: the lease likely has nothing about him getting paid extra because you want to sell. Tell him nicely that you will gladly pay him only on the condition that he gives you 10% ownership of the building. Otherwise the sale of your business has nothing to do with his lease.