Transferring the Lease

Location, location, location. 

That’s a mantra that’s commonly heard when the discussion turns to home values. It’s also an important consideration when it comes to businesses. Don’t blow up your sale by giving short shrift to matters involving this key logistic. 

The lease is an integral part of the sale process. And it’s typically during the tail end of due diligence that the parties contact the landlord to begin the process of transferring the lease. The transfer of the lease is critical if the location of your business is important. The more important the location of your business, the more attention you should give to this matter.

That’s why it pays – literally and figuratively – to handle the assignment or transfer of your lease properly. In this section, I show you how to do just that, from when to contact your landlord to what to expect with your security deposit in conjunction with a sale of your business – and a lot of stuff in between that you may not have yet considered. 

When To Contact the Landlord

The earlier you contact the landlord, the better. Landlords respect business owners who are upfront and give them advance notice that they’re 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 upfront reduces this concern and will also ensure buyers that the landlord is cooperative.

Approach the landlord early in the process and let them know of your intentions to sell your business. Ask what’s important to the landlord in terms of a new tenant, such as operational experience, credit score, or financial strength. When you find a buyer, position the buyer to meet the landlord’s needs. Help the buyer prepare a resume, financial statement, clean up their credit, and otherwise package themselves for the landlord.

The transfer of the lease is critical if the location of your business is important.

Assignment vs. Sublease

With an assignment, the lease is transferred to the buyer, and you remain on the lease as a guarantor. This can be good or bad, depending on your perspective. It’s good if you’re financing a portion of the sale price because this can enable you to take the business back if the buyer defaults, although it depends on how the assignment is worded. It can be bad because you will likely be held liable if the buyer defaults on the lease.

The landlord’s viewpoint is that you initially signed your lease for a specific term, probably two to five years. If you sell the business, they’ll keep your name on the lease, then add the buyer’s name to the lease and typically keep you on as a “guarantor.” 

Why does the landlord do this? Why not? Why would the landlord voluntarily agree to increase their risk without receiving anything in return? The landlord has nothing to lose, so they nearly always request that you remain as a guarantor.

In a sublease, there are actually two leases. 

  • Lease 1: Landlord to you, also called the master lease.
  • Lease 2: A lease from you to the buyer, also called a sublease.

Most leases address this issue and don’t allow it, so read your lease carefully. Look for a clause titled “Assignment and Subletting.” 

The main reason a sublease might be used would be when you’re 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, which gives you more control until you’re paid in full. 

Fees and Deposits

There is usually a nominal fee to transfer the lease, perhaps $1,000 to $5,000, which varies by landlord. The fee is reasonable, as assigning the lease involves some legal work on the landlord’s part, and they don’t benefit from it monetarily, other than the reduced risk of keeping you on as a guarantor.

The landlord will typically keep your security deposit, and the buyer will reimburse you for the deposit at closing. This prevents the landlord from returning your deposit and collecting a deposit from the buyer, which is two transactions. 

Problems Negotiating With the Landlord

The landlord does not necessarily have to approve the transfer of the lease to the buyer. Be sure to read your lease, as it should address this issue. The law in most states addresses assignments. Most state laws say that the landlord can’t “unreasonably withhold the assignment of the lease.” What does “unreasonably” mean? That’s the magic question. I’ve had my fair share of deals die due to landlords who outright refused to transfer or assign a lease for no demonstrably valid cause.

If a landlord wants to, they can put up a fight to keep you from transferring your lease for a variety of reasons. It certainly pays to make sure you and the landlord are on 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’s best to reach an agreement and move forward with both of you on the same page.

In some leases, the lease reads that the landlord receives half of the sale proceeds when the business sells. Am I kidding? No. This is rare, but I’ve seen it happen. The clause should read that the landlord should receive half of the “leasehold value” or half of the proceeds that are attributable to the value of the lease. But the landlords I saw wanted half of the sale price of the business. The owner fought the case in court and eventually gave up after spending $30,000 in attorney fees.

Read your lease, or at least have an experienced advisor read it to make sure there aren’t any major issues.