Lease Implications When Selling Your Business

Lease Implications When Selling Your Business

For many business owners, the idea of selling their business may seem inconceivable. It may seem so distant they do not even consider the significance of negotiating a new lease. However, a business’s leased premises can be one of its most important assets.

Can you negotiate a lease with the landlord while selling your business?  The answer is yes.

Maybe you’re wondering, “why would someone selling their business want to negotiate their lease?” Another good question.

The reason is simple: the landlord can kill a deal. He owns the land; he is, after all, “the Lord of the land,” and he can do anything he wants with it.  If the land is owned by somebody else, you need permission to transfer that lease to a third party. Is the lease close to its expiration date? If it is, you need to talk to the landlord. You must find out what he intends to do once the lease runs out.

What to Check for In Your Lease

A seller should take a close look at the written lease. Check the date of expiration. Does the lease include any options for renewal, and if so, what are the terms? Does your lease allow you to assign the lease to somebody else? Can you sub-let the property to the buyer of the business? If you can, what are your legal responsibilities?

Does the lease require payment of a transfer fee to the landlord? If so, who is supposed to pay it, the seller-lessee or the business buyer-sub lessee? Most likely, the seller will pay the fee, but terms of the deal could require the buyer to pay the fee, if the landlord approves.

The importance of a well-crafted assignment clause that anticipates the eventual sale of a tenant’s business cannot be overemphasized. A one-sided lease which, for example, makes all transfers subject to the landlord’s consent in its sole discretion or imposes rent increases or automatic termination rights in the event that the tenant proposes an assignment, has the potential to scare away prospective buyers because of the possible excessive delay and potential cost that will predictably occur when seeking to acquire the landlord’s consent to a proposed assignment.

The Landlord

Although landlords will often insist upon a total prohibition against assignment, there are industry standard compromises that can be reached to protect the landlord with respect to credit-worthiness, tenant mix, and operating experience (among other considerations), while also providing the tenant with an organized exit strategy in the event of a sale of the business. In most cases, failure to spend time and resources up front to negotiate a more favorable assignment or sublease clause will cost the tenant substantially more time and money in the end if he/she wishes to sell the business and assign its lease.

Once you, the seller, have studied the lease, the question becomes: should I approach the landlord now, or wait until a qualified buyer has been identified? Because the sale of a business is complicated, our advice is to talk with the landlord sooner rather than later. You’re going to want to know the landlord’s plan for the property, and his/her position about the sale before you go further.

Need a professional to help plan a successful exit strategy?

A professional business broker can help you tackle this, along with other steps, based on the specific circumstances of your business.

You can also download our Selling a Business Checklist, which offers insight into how to get your business ready to sell:

If you need help putting together a strategic plan, please contact the Benjamin Ross Group at 215-357-9694 to speak with a business broker who can help you start the process.