Tips on Transferring a Lease When Buying a Business

The lease of the premises occupied by the business is an important issue when buying a business.  A lease is a contract giving the lessee the right to operate a business from the rented premises.  It is a legally binding contract between the landlord or lessor and the tenant or lessee.  It is for a fixed period with a specified amount or rent to be paid up front or in monthly or quarterly installments.  In it are the terms and conditions as well as the rights and obligations of both parties relative to the occupancy.

The seller has the obligation to make sure that the lease can be transferred or renegotiated before selling a business.  Once the decision has been made to sell the business, the seller should inform the landlord of his/her plans.  The seller should speak to the landlord and iron out the details before getting into a sales deal with a prospective business buyer.  Landlords do not like surprises, neither does the buyer. 

For you, the buyer, here are some tips on How to Transfer a Lease:

1.  If you are to buy a business that relies heavily on its location for sales or revenue, review the lease contract between the seller and the landlord early in the negotiation process.  Determine the following:
 a.  Can the lease be transferred from the lessee to you, the buyer?
 b.  How long is the existing lease?
 c.  Can the lease be extended?
 d.  What are the general terms and conditions?   What does it say about assigning the lease to another party?

2.  The seller should provide you with written permission from the landlord that the lease can be assigned or transferred.

3.  Find out the conditions or criteria of the landlord regarding the lease transfer.  There are some cases where the landlord requires the buyer to pay rent for a year in advance, increase the rent amount, or renovate the premises at the buyer’s expense.

4.  Remember that buying a business does not automatically include the premises occupied by the business.  In most businesses, the premises is a leasehold.  Transferring the premises to the buyer is a separate transaction in itself.  Otherwise, you will have no right to occupy the property even if you are the new business owner.

5.  The transfer of the lease may be through
 a.  a new lease.  This is between the lessor and the buyer.
 b.  a sub-lease.  This is between the seller and buyer with the consent of the landlord.  The seller of the business becomes the landlord of the buyer.
 c.  the assignment of the lease.  This is the most common method for businesses.  The seller assigns the existing lease to the buyer upon the approval of the landlord.  The buyer assumes the responsibility of the lease.  A Lease Assignment Deed should be drafted by a lawyer for the actual transfer of the lease to the new tenant.

6.  You should determine the impact of the lease assignment to the future viability of the business.  Rent is typically the second largest expense for small businesses, next to the salaries of employees.  Will you get favorable terms from the landlord?  Or, will the business continue to be profitable if you relocate?

7.  A landlord, sensing some leverage during the transfer of business ownership, may insist on receiving something in return for his/her consent to the assignment of lease.  This “something” could be an increase in rent, remodeling of the property, or a huge cash payment.  You can negotiate that the seller bears the cost of the rent increase demanded by the landlord or at least split the cost of the increase with you, or to reduce the purchase price of the business.  The outcome of the negotiations will depend on your creativity and leverage.

If the actual location of the business is critical to the business you are buying, obtain the consent of the landlord at an early stage of negotiations.  Contacting the landlord will let you know if you will go through with the purchase.  Are the terms and conditions of the lease favorable to you as a buyer?  Will there be any hitches?

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