Common Issues with Commercial Lease Transfers During a Business Sale
When a business changes hands, the new owner will often want to stay in the same physical location where the business currently resides, especially if there is a sizable customer or client base that is familiar with it. In order to accomplish this, the new owner will most likely want to take over the current owner’s lease on the commercial space that they occupy. Usually, it will be to the new owner’s advantage to assume the lease and its terms and conditions rather than start a new lease.
In many instances, businesses negotiate longer-term leases with their commercial landlord in exchange for lower rent and more favorable terms. This can be a win-win agreement for both parties, providing stability and predictability for one of the primary expenses that a business has to account for, and providing a steady income on the commercial space that the landlord can plan on for several years.
Naturally, a new owner would want to take advantage of the same favorable terms that the previous owner already has in place, but it is not always that simple. Provisions within some lease agreements specifically prohibit the assignment of the lease to a new owner or they may contain restrictive clauses to make the process of assigning the lease more difficult.
Here are some of the common challenges that may come up when attempting to transfer a commercial lease during a business sale:
Lease Transfer Requires an Assignment Transfer Fee
Usually, the terms and conditions of a lease agreement do not allow for a lease transfer without the approval of the landlord. During the sale of a business, the landlord might ask for a sizable fee in order to transfer the lease to a new tenant. Keep in mind that the landlord may not be familiar at all with the new owner, and they could use that as justification to request a fee that they believe is commensurate with the additional risk that they are assuming.
As an aside, commercial landlords also know that when an owner is selling their business, they are usually walking away with a large sum of money. Some landlords see this as an opportunity to bank some additional cash themselves, and they might even want a percentage of the sale in exchange for transferring the lease.
Lease Transfer Requires a Deposit
Another roadblock that a landlord might put up when a business owner (who is selling) wants to transfer a commercial lease is to require a large deposit in exchange. This again is justified in the landlord’s mind because of the risk they are taking on with a new tenant. Some landlords make unreasonable demands, however, such as requiring a deposit that is equal to several months’ worth of rent.
Landlord Has Issues with the New Owner
When a prospective business owner wants to become a tenant on a commercial lease, the landlord will want to thoroughly vet the new tenant before allowing the lease transfer to go through. In some instances, the landlord might find something in the new owner’s background that makes them apprehensive about approving the transfer.
Perhaps this person had some financial problems in the past. Or maybe they have a DUI or something else that pops up on their criminal record. If this type of situation occurs, the landlord might want some additional assurances before leasing their commercial space to the new owner.
One way to appease the landlord in a situation like this is to agree to a larger deposit and/or a larger lease transfer fee. The buyer and the seller (and their attorneys) will need to work out who will be responsible to come up with the increased funds to make the lease transfer happen, but if it is because of issues in the buyer’s background, then there is a good chance that the seller will want the buyer to come up with the additional funds.
Landlord Wants the Current Owner to Remain on the Lease
There are some cases in which the landlord might want additional security beyond a deposit or lease transfer fee. Their reservations about the new owner might be such that they want the current owner to stay on the lease. This way, if the new tenant does not pay the rent, the landlord has two separate parties from whom they can legally pursue payment rather than just one.
While the seller might not want to stay on the lease and be on the hook for lack of payment or damage to the premises on the part of the buyer, this could be the only way to make the deal go through. But if the seller has already pre-qualified the buyer themselves, then they might be reasonably comfortable remaining on the lease with them until the current term expires.
Work with Experienced Alabama Business and Real Estate Attorneys
When an owner is selling their business, there are a lot of complex issues that need to be worked out, and one that is often overlooked is transferring the commercial lease to the buyer. This is why the parties involved in a transaction like this should work with a skilled and knowledgeable attorney to help ensure that their legal rights and interests are fully protected.
For strong legal guidance with business sales and commercial leasing issues in southern Alabama, contact Stone Crosby, P.C. for assistance. Call our Daphne, AL office today at (251) 626-6696 or send us an online message to schedule a consultation with one of our attorneys.