Transferring the Lease When Selling or Buying a Business

Jacob Orosz Portrait
by Jacob Orosz (President of Morgan & Westfield)

Executive Summary

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 sales by giving short shrift to matters involving this key logistics.

The lease is an integral part of the sale process. Dealing with the landlord or transferring the lease can be one of the two biggest deal killers when selling your business, the other being your financials.

That’s why it pays –literally and figuratively — to handle the assignment or transfer of your lease properly. In this article, we 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 considered just yet.

A good time to get started is right now …

When should I contact my landlord and let them know I am selling my business?

The earlier, the better. Landlords respect business owners who are upfront 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 upfront will reduce this concern and will also ensure buyers that the landlord is cooperative 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 addresses assignments. Most state laws say 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 can vary. It certainly pays to make sure the landlord and you 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 is best to reach an agreement and move forward with both of you 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 as a guarantor. This can be bad or good, depending on your perspective.

  • 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, you will likely be held liable.

The landlord’s viewpoint is that you initially signed your lease with a specific term, probably two to five 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? Why would the landlord voluntarily agree to increase their risk without receiving anything in return?

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 request that you remain as a guarantor.

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)

Most leases address this issue and do not allow it. Read your lease carefully. Look for a clause titled “Assignment and Sub-Letting.”

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.

What is the craziest story you have heard involving the transfer of a lease?

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 have actually seen it happen. The clause should read that the landlord should get half of the “leasehold value” or half of the proceeds that are attributable to the value of the lease. However, 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 in the lease. I have also seen many landlords who simply refused to assign a lease, and for no good reason (in my opinion).

Is there a fee to assign the lease?

Sometimes there is, usually from $500 to $1,000. This varies from state to state. The fee is reasonable as assigning the lease can involve some work on the landlord’s part, and they do not benefit from it monetarily.

What can I do to ensure that the landlord will assign the lease?

Approach the landlord early in the process and let them know of your intentions to sell your business. Ask what is important to the landlord in terms of a new tenant (experience, credit score, financial strength, etc.). When you find a buyer, position the buyer to meet the landlord’s needs. Help the buyer prepare a resume and 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.