Selling a business involves more than just selling the name, equipment, inventory, goodwill, and clientele. In many cases, you will also be turning over the physical location of your business to the new owner. And if you have an active lease for the commercial space that you occupy, then the buyer will probably want to take it over.
In many instances, a business that occupies a commercial space has a long-term lease with a payment that is locked in for the duration of the contract that may be significantly lower than what a new tenant would pay. So, if the lease can be assigned to the new owner, it would be much smoother (and probably a lot better for the buyer) than having to negotiate a brand-new lease.
Assigning a commercial lease may not be as simple as it sounds, however, depending on the terms and conditions of the lease agreement. In fact, provisions with regards to the assignment of leases during a transfer of ownership can be a complicating factor that could even hold up the sale. Some lease agreements specifically forbid assigning the lease to a new owner. Others have restrictive clauses that could make the lease transfer process difficult.
Here are some common issues that come up when business owners want to transfer a commercial lease to the buyer:
Table of Contents
- Not Enough Time Remaining on the Lease
- The Assignment Transfer Fee is Excessive
- The Commercial Lease Assignment Requires a Deposit
- The Landlord Has Reservations About the Buyer
Not Enough Time Remaining on the Lease
The ideal scenario for the buyer is to inherit a long-term lease with a predictable payment that is locked in for the foreseeable future. This is one way to protect them from inflation, which of course is a major concern in the current economy. So, in the buyer’s mind, the longer the lease, the better it is for them.
This could become an issue if the current business owner has less than a year left on their lease or worse yet, they are renting the space month-to-month. In a scenario like this, the landlord has most of the leverage during the lease renewal negotiations.
The Assignment Transfer Fee is Excessive
The landlord might ask for a large fee to assign the lease, justifying the fee as compensation for the risk they are taking by leasing the space to a new tenant. Keep in mind that the landlord knows you are selling the business, so they assume that you are making a good profit on the sale. In some cases, they might ask for a percentage of the sale price in exchange for transferring the lease.
The Commercial Lease Assignment Requires a Deposit
When a lease is transferred, it is likely that the landlord will ask for a security deposit from the buyer. This again is justified in the mind of the landlord by the risk they are taking on with the new tenant. A reasonable security deposit would be about one month of rent give or take, but this is subject to negotiation. Some unreasonable landlords might ask for several months’ worth of rent for a security deposit, and this could become a problem for the buyer. In such a scenario, the seller may need to help with the security deposit or work something else out.
The Landlord Has Reservations About the Buyer
In some instances, the landlord might not want to transfer the lease to a particular buyer. The landlord might be dissatisfied with the buyer’s financial situation and other aspects of their background, which might make them apprehensive about signing the lease. Depending on the situation, they might outright refuse an assignment (to a new owner) or require that the seller’s name stays on the current lease to finalize the agreement.
Sellers can prevent this from happening or at the very least minimize the chances of it occurring by pre-qualifying the buyer. And this is one of many ways that working with an experienced business broker can be invaluable. Business brokers have in-depth expertise handling these types of transactions, and one of the things that they do for the seller is carefully screen prospective buyers to make sure they are qualified.
Business brokers who have been in the industry for a while will have also encountered many of the common issues that come up when trying to transfer a lease during a business sale, and they will know how to overcome these challenges. Your broker will work closely with the parties involved to successfully resolve any issues that come up with the lease, so the buyer and seller can move forward with the sales process.