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How Is The Lease Handled When Selling My Business?
How is my lease handled when I sell my business?The lease is an integral part of the sale process. The landlord or lease can be one of the two biggest deal killers when selling your business; the other being your financials. It certainly pays to properly handle the assignment or transfer of your lease.
When should I contact my landlord and let him know I am selling?The earlier the better. Landlords respect owners/tenants who are up-front and give them advance notice that they are selling. I see many sellers spring the news on the landlord three days before closing, only to have the landlord refuse the transfer of the lease. Contacting the landlord up-front will reduce this concern and will also ensure buyers that the landlord is flexible and agrees with the game plan.
Doesn’t the landlord have to approve the transfer of the lease to the buyer?No, not necessarily. Be sure to read your lease as your lease should address this issue. The law in most states address assignments. Most state law says that the landlord cannot “unreasonably withhold the assignment of the lease”. What does “unreasonably mean”? That’s the magic $25,000 question, or depending on how expensive your attorneys are.
If landlords want to, they can put up a fight to keep you from transferring your lease. The reasons may vary. It certainly pays to make sure the landlord and you are one the same page before you invest a lot of time and effort in selling your business. It doesn’t pay to litigate this question. It is best to reach an agreement and move forward with you both on the same page.
What is an assignment of the lease?With an assignment, the lease is transferred to the buyer and you remain on the lease. This can be bad or good. It is good if you are financing a portion of the sale price because this will enable you to take the business back if the buyer defaults. It can be bad because if the buyer defaults on the lease, then you will likely be held liable.
The landlord’s viewpoint is that you initially signed your lease with a specific term, probably 2 to 5 years. If you sell the business, they will keep your name on the lease and add the buyer’s name to the lease. The landlord will typically keep you on as a “guarantor”, which means you are on the hook for the lease but you have few rights left.
Why does the landlord do this? Why not? What else are you going to do?You don’t have many other options and the landlord has nothing to lose so they nearly always do it.
What is a sublease?In a sublease, there are actually two leases.
- Lease 1 – Landlord to you (Master lease)
- Lease 2 – You to the buyer (sublease)
The main reason a sub-lease might be used would be when you are financing a portion of the sale price. Because you still have a lease with the landlord, you still have full privileges to access the property. This gives you more control until you are paid in full.