BUSINESS SALES AND LEASE ASSIGNMENTS: TIPS FOR SELLERS
In most every business sale, an essential but often misunderstood component of the sale is the “assignment” of the seller’s lease to the purchaser. In a typical lease assignment transaction, the purchaser steps into the seller’s shoes and becomes the “tenant” under the lease, while the seller remains liable for the tenant’s obligations going into the future.
The typical commercial lease agreement does not permit the seller to assign the lease without the landlord’s consent (and the most draconian of commercial leases grant the landlord sole discretion to approve or reject the proposed assignment). As such, in order for the seller to complete the sale transaction, the seller must first secure the landlord’s approval to the assignment. Most landlords will require the purchaser to complete a credit application and submit financial records and a business plan so that that the landlord can verify the purchaser is qualified to assume the tenancy. This review process can potentially become the most frustrating part of the business sale if the landlord is slow to respond or unreasonable in its demands. For the typical landlord, approving proposed lease assignments is not a high priority, and represents more of a nuisance than a welcome business transaction. Landlords (and their attorneys) can also charge exorbitant fees in connection with the review of the transaction and the preparation of the assignment documentation. [You may find yourself asking: how in the world can a four page document cost upwards of $5,000 to prepare?]
Sellers often assume that the purchaser will secure a brand new lease upon the closing of the business sale, with the seller’s existing lease to be terminated. This is usually not the case, as the typical landlord prefers to assign the existing lease without any re-negotiation of lease terms. It follows that sellers are often surprised to learn that they (along with any personal guarantors) will not be released from continuing liability to the landlord after the assignment is completed. This can potentially kill the business sale if the seller is unwilling to become the purchaser’s surety.
What are some ways for sellers to improve the lease assignment process?
First and foremost, when negotiating a commercial lease agreement, the business owner should pay close attention to the assignment section. If you ask for it, the vast majority of landlords will insert into the lease that the landlord will not unreasonably withhold, condition, or delay consent to a proposed assignment. This simple addition to the lease can save the business owner a tremendous amount of grief, as it limits the landlord’s ability to reject the proposed assignment. Some landlords will also agree to add “permitted transfer” language to the lease that allows the seller to assign the lease without the landlord’s consent in certain circumstances. Many landlords will also agree to cap the assignment review fees at a reasonable number (always ask for this). Bottom line, in negotiating the lease, the business owner needs to be cognizant of its exit strategy as it relates to the assignment clauses.
Second, in the business sale agreement, make clear that the lease assignment is a contingency of the sale, and if you are unwilling to sell the business without a full release from the landlord, add this as a contingency as well. Most landlords will agree to release the seller and any guarantors from continued liability when the present term of the lease expires, but you may have to ask for this. Some (but not many) landlords will agree to an immediate release upon assignment, with or without strings attached (such as prepayment of rent, establishment of escrow, multiple personal guarantees from the new business owner, a larger security deposit, etc.).
Third, make sure that your sale agreement contains strong indemnification language that requires the purchaser (and the owners of the purchaser!) to indemnify you for any post-assignment losses that you incur in connection with the lease. That is to say, if the purchaser defaults on the lease and you have to pay a sum of money to the landlord on the purchaser’s behalf, make sure you have the right to sue the purchaser to recover such amounts plus your attorney fees.
Fourth, know your leverage, and shower the landlord with kindness. Many business owners take an aggressive and curt approach when asking their landlords to approve the lease assignment, as if the landlord owes them a favor. As touched on above, most landlords could care less about helping you complete your assignment transaction, and are perfectly content to have you stay on as the tenant indefinitely (assuming you pay your rent). Being nice, courteous, and respectful goes a long way when asking the landlord to move along a transaction that does not impact the landlord’s bottom line.
Fifth, be organized when presenting the proposed transaction to the landlord. Try to submit all documentation requested by the landlord at the same time. Presenting the information piece-meal can be irritating to the landlord, slow down the review process, and increase the review costs.
Finally, to the extent possible, time your exit in a way that maximizes the attractiveness of your lease to the purchaser. Don’t wait until your lease is about to expire to sell the business, as purchaser will have to request an extension from the landlord. This will complicate the process and shift control over the transaction from the seller to the purchaser (who may not be as adept as you are in communicating with your landlord). If the purchaser is unable to reach terms with the landlord, it will kill the business sale. Furthermore, if you have made significant leasehold improvements that will be retained by the landlord after the lease expires (restaurant build-outs are the best example), a cutthroat purchaser may decide to wait out the expiration of your lease, sign a direct lease with the landlord, and attain the benefit of your leasehold improvements without having to pay your for them.
In conclusion, the seller needs to give serious consideration to the lease assignment process, both when negotiating the new lease and when it comes time to sell the business. The seller should not assume that the landlord will be flexible or respond quickly following receipt of the assignment request. However, by following the recommendations outlined in this article, the seller may be able to minimize the chances that the lease assignment process derails the sale transaction.
We Can Help
GRDD Law maintains a robust commercial leasing practice in addition to its business and corporate practice. This puts our attorneys in a good position to help our business clients negotiate leases and navigate the lease assignment process. We understand how commercial landlords operate, and we know what a fair market lease should look like. We make every effort to efficiently negotiate good deals for our clients by focusing on the areas of the lease that are most likely to impact their businesses (like lease assignments!).
Please consider the law firm of Gross, Romanick, Dean & DeSimone, P.C. for all of your business and landlord/tenant legal needs, including registered agent services, litigation, contract review, buying and selling businesses, business start-up and formation, leases, evictions, employment matters, and debt collection. Go to www.grddlaw.com to learn more about us. Call us at 703-273-1400 or send an e-mail to email@example.com.
About Our Law Firm
Gross, Romanick, Dean & DeSimone, P.C. is a law firm located in Fairfax, Virginia. Since 1980, our attorneys have dedicated themselves to providing cost efficient legal services to individuals and businesses in Northern Virginia and the Washington, D.C. Metro Area. We meet our clients’ needs by applying hard work with integrity to find creative and practical legal solutions. Our extensive business litigation experience, and our understanding of the transactional mistakes that often lead to expensive courtroom battles, helps us to advise our clients on business deals and the resolution of commercial disputes. To learn more about our firm, visit: www.grddlaw.com or call us at 703-273-1400