Assignment of Commercial Leases | Gross, Romanick, Dean & DeSimone, P.C.
In most business sale transactions, the buyer will want to operate the business at the current location(s) after the sale. As a result, the seller’s real property leases must be “assigned” to the buyer as of the closing date of the sale. A commercial lease is “assigned” when the buyer steps into the shoes of the seller and becomes the “tenant” under the lease. In the vast majority of cases, the written consent of the landlord must be obtained before the lease can be assigned to the buyer. One of the first things the buyer should do as part of its due diligence study is to determine whether a written lease agreement exists, and if so:
(a) whether the lease can be assigned;
(b) how many years remain in the lease term; and,
(c) whether the tenant has the option to extend the lease term. The buyer needs know that after the sale it has the right to operate the business it is current location(s) for an acceptable period of time.
For more information about reviewing commercial leases, check out our video at: https://grddlaw.com/commercial-lease-review-fairfax-virginia
Some commercial leases allow the landlord to unilaterally deny consent to a proposed lease assignment. Some commercial leases allow the landlord to deny consent unless certain conditions are met (e.g. the new tenant has a net worth equal to the current tenant, the new tenant will not change the use of the premises, etc.). Some commercial leases allow the tenant to assign the lease without the landlord’s consent in connection with a business sale.
Typically, the lease assignment is a condition precedent of the business sale (meaning, either party can walk away from the sale if assignment from the landlord is not obtained). The buyer should never assume that obtaining a lease assignment is an easy process. In fact, securing consent to assignment from the landlord can often be the most frustrating part of the entire business sale process. As an initial matter, most leases require the tenant to pay for the landlord’s review of the request, including attorney fees (which can be expensive if not capped). The buyer and seller must allocate responsibility for these fees in their purchase agreement. Some landlords tend to be non-responsive to review requests for various reasons, and some landlords arbitrarily deny consent without any legitimate business reason. In cases where the buyer requires an extension of an expiring lease, the buyer may have to negotiate new terms with the landlord, which can be a long and complicated process. In cases where the seller or its owners want to be released from any continuing obligations under the lease (which is not the norm), another separate negotiation may need to take place.
For these reasons, it is almost always a good idea to start working on the lease assignment as early as possible in the sale process so that it does not delay the sale. It is customary for the buyer’s attorney to contact and push the landlord in order to keep the assignment process moving forward.
If possible, business owners should try to include “permitted transfer” clauses in their commercial leases allowing for assignment without the landlord’s consent in connection with a business sale. Many landlords will agree to include such language in the lease, typically subject to some conditions being met (e.g. net worth threshold for the buyer and its owners). This will make the business more attractive to potential buyers, and can save the parties a lot of time, effort, and money during the sale process.
The attorneys of Gross, Romanick, Dean & DeSimone, P.C. have substantial experience assisting business owners with regard to buying and selling small and medium-sized businesses. Representative businesses include medical, dental, and veterinary practices, restaurants, information technology firms, construction firms, government contracting firms, moving companies, and many other types of service providers. The buy/sell process can be relatively simple or it can be very complicated depending on a variety of factors unique to each transaction. Our attorneys understand the competing interests that buyers and sellers have, and we know how to efficiently achieve our clients’ goals while protecting their interests.