Don’t overlook the lease — it’s one of the most instrumental elements of the sale process. The assignment or transfer of your lease should be handled with care because having issues with leases or landlords is a common deal-killer.
Table of Contents
- When Should I Contact the Landlord About Transferring the Lease?
- Doesn’t the Landlord Have to Approve the Transfer of the Lease to the Buyer?
- What is an “Assignment” of the Lease?
- What Can I Do to Ensure That the Landlord Will Assign the Lease?
- How is the Security Deposit Handled?
- What is a Sublease?
When Should I Contact the Landlord About Transferring the Lease?
In general, the earlier, the better. If you are upfront as early as possible and give your landlord advance notice that you are selling, they will likely respect you for it. We’ve had 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 will reduce this concern and will ensure buyers that the landlord is flexible and agrees with your game plan.
Doesn’t the Landlord Have to Approve the Transfer of the Lease to the Buyer?
Not necessarily. Your lease should address this issue, so be sure to read it. The law in most states addresses assignments. Most state laws say that the landlord cannot “unreasonably withhold the assignment of the lease.” What does “unreasonable” mean? That’s the magic $50,000 question (or more, depending on how expensive your attorneys are).
If landlords want to, they can put up a fight to prevent you from transferring your lease. While the reasons can vary, it 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.
Lease agreement: Many buyers ask specific questions regarding the terms of your lease agreement. Prepare for the buyer’s questions by reading your lease and having it readily accessible. You should have answers to the following questions:
- Is the lease assignable?
- Are you a personal guarantor on the lease, and if so, are you willing to remain as guarantor after the business is sold?
- When is the start date of your lease?
- When is the expiration date of your lease?
- Do you have options to renew? If so, what are the terms?
- Are the renewal options automatically transferred with the lease? Be careful with this one — renewal options don’t always transfer when the lease is assigned.
- What is the base rent?
- Does the base rent include maintenance, insurance, and property taxes, or are these in addition to the base rent?
- Does the base rent increase annually? If so, by how much?
- How much are the triple net charges? Are they included in the rent or are they in addition to the rent?
- What are the permitted uses? Can the buyer offer new products or services at the location without the landlord’s approval?
- How much is the assignment fee?
- What are the minimum requirements for a new owner to be approved by the landlord?
What is an “Assignment” of the Lease?
With an assignment, the lease is transferred to the buyer and you remain on the lease as a guarantor. 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.
This can be bad or good, depending on your perspective and objectives. It’s 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’s bad because you will be held liable if the buyer defaults on the lease.
If you assign the lease to the buyer, there can be a fee, often ranging from $500 to $5,000 or more. The amount can vary from state to state and may depend on the size of the property and complexity of the lease.
What Can I Do to Ensure That the Landlord Will Assign the Lease?
As soon as you decide to sell your business, let your landlord know. Ask your landlord what is important in terms of a new tenant (experience, credit score, financial strength, etc.). Make sure the buyer is qualified and will meet the landlord’s expectations. If the buyer is an individual, help the buyer prepare a resume, financial statement, clean up their credit, and otherwise package themselves for the landlord.
How is the Security Deposit Handled?
The landlord will typically keep your security deposit, and the buyer will reimburse you the money for the deposit. This prevents the landlord from returning your deposit and collecting a deposit from the buyer, which is two transactions as opposed to one. Always make it easiest for the landlord. Remember, they are the king or queen.
What is a Sublease?
In a sublease, there are two leases: Lease 1 — landlord to you (master lease); Lease 2 — you to the buyer (sublease).
This is rare as most landlords won’t allow it. Be sure to read your lease carefully, as most leases address this issue and don’t allow assignments. Look for a clause titled “Assignment and Subletting.”
The main reason a sublease 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 by the buyer.