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.”
Purchased hockey arena from municipality they were running a weight room for seven months at my expense all utilities wouldnt pay any rent for seven months used utilities etc refuse to pay anything for rent they say i never had a sighed agreement or lease. Now they want to sell my property on tax sale
Sorry to hear this Dale,
This sounds like a legal challenge. Rent/TICAMs should have been agreed to before the purchase through a lease.
I’d consult an attorney; there are some great ones on this forum.
I am a restaurant seller and accepted an offer for a 3 weeks ago.
So we are waiting for landlord approval of assignment lease.
They have checked buyer’s credit for 3 weeks and they told me unreasonable reasons why they need 3weeks; buyer wants to do all interior.
But last month, our 2 neighbors opened shops, and they did changed whole structures.
So I asked them about this.
And then they notified the buyer: If they want to get a approval from landlord, they should lease newly with increased rent fee, even though our restaurant lease remains 4+5years more. Is it legal?
If buyer breaks this contract for this, can we do something to landlord?
I asked them several times for approval for assignment lease because my husband has a health problem so we need it asap.
I think they used our situation greedily. We need to sell for my husband’s back pain.
How can I do this?
If other offers are made, the landlord will give us this suffering again.
Hello Joy,
Congrats on selling your business and sorry to hear about the challenges surrounding it.
I’m not a real estate attorney, and that would be the best resource to answer this, but based on your comments about that the prospective tenant is “reasonable” (Look for a provision in your lease probably around assignment which should state that says it can’t be unreasonably withheld), and the fact that you have time left on your lease, I don’t see why the landlord wouldn’t assign the lease.
Normally if landlord don’t want a new tenant for some reason, they just ask for a higher deposit or something similar to make it less attractive for them.
Your landlord not responding to you sounds frustrating, but please also realize that it’s not uncommon for landlords to operate on a slower pace than business owners, and lease assignments often take a month or more.
My advice would be to find out who is responsible for the assignment decision in your landlord’s office; you may be communicating with a gatekeeper of some sort instead of a decision maker, and if possible have a person to person conversation with them so they are more motivated to help you accomplish your goals.
This is a lot of the work I do as an intermediary; we get beyond reading leases and exchanging emails, and have conversations about what people are trying to accomplish and how to help them achieve those goals. Be sure to recognize and understand what your landlord’s goals are as well; they are most focused on keeping the property rented, in good condition, and cash flowing for the long term.
I hope this is useful and keep us updated on your progress!
I just signed a lease. Now landlord wants my business I been in same location 47 years. He wants me to give an offer
Hey John, please provide more details so we can help you. If you signed a lease you should have an agreement with your landlord regarding the use of the space to run your business… What kind of offer is he requesting of you?
Hi there, I just purchase an commercial business from an previous tenant and took over their lease.. This is my first time purchasing an business, upon purchasing the business the seller agrees to leave everything that was in the salon that includes chairs, polish, wax station and designs kits… The seller told us that the landlord will be sending us a new lease but never did this was back in Oct 2021 and still no lease should I contact the landlord? Help please thank you
Congratulations on your salon acquisition Anna. Normally access to the space is handled during the business deal negotiation, before you fully take over the business in the form of a new lease or lease assignment.
Not having this or knowing the details leaves you in a prone position; you could be evicted or replaced by your landlord as you have no formal agreement.
Chances are your landlord doesn’t want to replace you if you are paying rent, so I’d recommend formalizing whatever agreement you currently have.
Just to be clear, the agreement with your landlord is separate from the agreement that you had with the former business owner, but the landlord knows it’s inconvenient for you to relocate your business so you don’t have as much leverage after you’ve acquired the business.
I’d recommend talking with a real estate attorney to review any proposed lease and ensure it’s in your best interest from a legal perspective.
I bought a small business paid in full, have been running the business now for about 7 months .And the previous owner is threatening to take over the business again, this is due to the fact that the lease is still under his name. I have been struggling to change the lease to my name, but every time the property manager called me he says he haven’t sold the business. I have the sell agreement that was signed. What rights do I have as the buyer in this case.
Hey Godfried,
I’m sorry to hear that you are in this situation. Typically access to the space is handled before the closing. While an attorney would be best suited to help you solve this challenge, I would recommend looking at your purchase agreement that you signed with the business owner to see if it specifically states that you are entitled to access to the lease premises. This may help your cause if the language is in your favor.
Godfred:
It sounds like the sale of the business was not perfected. Make sure when you purchase a business that the sale is fully documented, and preferably, the documents are reviewed by your attorney (don’t even take the advice of the seller’s attorney). It is not clear from your statement whether you bought the stock of a corporation, the shares of an LLC, or if you just bought “assets in place” and not the full business including its agreements. You’ll need to have a nice talk with your new attorney.
I was leasing part of a building and owner sold without notice. Can she do that?
Hi Steve,
It really depends on the terms of your lease agreement with the landlord.
If it’s silent on this point, then the landlord may do whatever they want.
All the best…
My parents owns a small business (a liquor store) and we want to sell it. We have the buyer and all paper work is done, except the landowner’s approval & sign. At first he keep delaying to give us answer, it’s been 4 month passed now he is asking us (seller) to sign the “modification & extention lease” that saying for 10 years we (seller) pay lease, not the buyer. We, of course, did not sign and refused. Is there anything we can do this case?
Hi Ellen,
It really depends on how much leverage you have with the landlord.
When your existing lease ends is important. Whether you (or your buyer) have the ability to relocate the business is also important. And the credit worthiness of the buyer is a huge factor.
In this situation, it’s unusual for the landlord to ‘modify or extend’ your existing lease by requiring the sellers to pay the lease for 10 years. Typically, the landlord will ask the sellers to personally guarantee the lease for the remainder of the existing lease term.
Again, your leverage in the negotiations depends on several factors and will influence how you negotiate the lease terms.
Hope this helps a bit.
I am thinking of selling my property that i lease to a car
rental franchise the property is owned by me but all the property around is owned by rhe airport and they are wanting to sign a new 10 yr lease do you think i will have a hard time selling?
Hey Kenneth,
That sounds like a legal question so I’d consult with a real estate attorney, but my take as a business broker is that you will be committing to selling the property to another owner who wants to have a car rental franchise for the next 10 years, or you may have to buy the car rental franchise out of the remainder of their lease if you get an offer for your property that is worth it.
As an example, a restauranteur in my market was recently paid a fee to evacuate his leased space so that a developer could buy the building/lot he his restaurant was located in.
He had a valid lease, so buying him out was the only way to get him to leave.
This could be a similar situation for you.
I hope that’s useful.
I am buying a business that has a triple net lease. The owners lease is up and when I purchase the business I will be signing a new triple net lease. The problem is we just found out that the Ac/heating system is failing and will never pass an inspection. The lease clearly states that the tenant is fully responsible for the maintenance and repairs to the system. The owner has been using zip ties and duct tape on it and none of it is even up to code. It’s over 30 years old and rotting away. The lease states that at the end of the lease all systems including this one shall be in good working condition as they were when the tenant signed the lease. I am very hesitant to sign a new lease until the system is repaired properly an or replaced. Who is responsible for the sellers willful neglect?
Hey Piper,
I’ve been on deals with similar situations and I know it can be a sticky widget. Here are some salient points of these circumstances:
– The landlord wants you to sign that lease as they don’t currently have anyone on the hook moving forward.
– The landlord also should know that it’s time to replace that unit.
– The lease probably indicates that the former tenant was responsible for preventative maintenance, so the landlord has a path to hold them accountable if it’s not in working order.
One occasion when I’ve seen this scenario before, the incoming tenant was one that the landlord really wanted, and that incoming tenant had their own HVAC professionals inspect and report the status of the systems as out of date. The landlord asked the outgoing tenant for proof of PMA (Preventative Maintenance Agreements), hoping to hold them accountable, but once he provided evidence that he’d done all he could, the landlord replaced the HVAC units for the incoming tenants. They were more than 25 years old in that case.
I would suggest you follow a similar approach by having your own professionals inspect the units, and work with the outgoing tenant and the landlord to work towards a solution.
I’ve also seen landlords cover part of the cost of the HVAC, and finance the balance over the term of the lease.
It will come down to how interested they are in you as a tenant, how much they want the current tenant replaced, and how much report/goodwill you are able to build with your potentially new landlord.
Hope this is helpful!
I am selling my business I am on the lease i own everything in the buildingI need to know how do you go about until they pay off the business how does this work so I am guaranteed to get my money before I give up the building because as you know once your name is off the lease you or not they can stop you from entering the building
Hey Tammy, congrats on selling your business!
Big picture, you have a deal with your buyer of the business, and that person is getting all of the assets of the business (tangible items like shelves & inventory plus the intangible items like “goodwill”)
You also have a deal with your landlord if you still have a personal guarantee and are assigning your lease. Your landlord is also making a deal with your business buyer as their new tenant for future rent payments…
You can negotiate with both your business buyer and your landlord, and you should to know and understand your risks. It’s also a great idea to get professional assistance from a business broker and/or business attorney.
It sounds like you did an installment sale but you are concerned they won’t make all payments, and you may get stuck with a defunct business and a lease payment. If this is the case, you should talk with your attorney about collateralizing (putting a lien against) the assets of your business, and/or your buyer’s personal property, until you are fully paid. You may also want to negotiate with the landlord a clause that would allow you back into the space if your business buyer defaults and you need to take it back over…
Your landlord may be attempting similar a collateralizing strategy for your business buyer/their new tenant as a guarantee for rent payments, so it’s important to understand both deals.