By Guest Contributor Gregory A. May, Esq. www.kieselandmay.com

A vast majority of business sales do not involve the sale of the underlying real estate, nor does the business even own the underlying real estate.

Instead, most businesses lease their commercial space, and the sales contract provides that the Buyer must negotiate an assignment of said lease.  While you may believe that this is a simple formality, you would be very surprised how many deals are held up by the failure to timely obtain an assignment.

In fact, I find that landlords can be downright reluctant to approve an assignment of lease, as they are very happy accepting monthly checks and carrying on without disruption.  More commonly I am amazed by the sheer incompetence of the Landlord’s property manager. It seems that most property managers approach a request for an assignment like Americans approach payment of their income taxes.  Wait until the last minute, and then request an extension. So the best advice is to act quickly.

First things first, request a copy of the current lease and all modifications thereto.  Find the provision that controls assignments, and determine the standard for assignment.

The standard for assignment will range from very restrictive to non-existence.  Sometimes landlords will maintain complete discretion in approving the assignment, which means that they hold all of the cards.  There is not much you can do under those circumstances, but play nice and be cooperative.   In other rare instances assignments are freely permitted. If that is case, pat yourself on the back and consider yourself lucky.

However, in most deals I find that the parties must first seek the landlord’s consent, which must not be unreasonably withheld.  This means that that landlord gets to approve the new tenant, and will likely want someone that is equally qualified and as financially sound as the exiting tenant.  In order to make this assessment, the landlord is going to want to see financials.  Do yourself a favor and contact the Landlord or the property manager as soon as possible to determine what kind of application, fee and/or financial information they require.

While reading the assignment provision you might be surprised to find mention of a Lease Assignment Fee.  This is often times a nonrefundable fee that the landlord charges just to consider a lease assignment application, and it commonly ranges between 0-$2,5000.00, depending on the space.  Landlords’ are reluctant to waive this fee, so it is best to address the issue in the language of the purchase contract.

If you don’t specify who is responsible for the assignment fee, then expect a fight on this issue, or at least some hurt feelings. While you’re at it, make sure you address the issue of deposits. Will the lease deposit remain with the landlord? Will the Seller get a credit? Remember the language of the contract controls, and a new business owner can easily get off to the wrong foot if they have to shell out an extra $10,000.00 in unexpected deposits and assignment fees.

Another common surprise that arises with a lease assignment is the Landlord’s demand for a personal guarantee of the lease.  That is, the landlord demands that the individuals running a corporation, partnership or LLC personally guarantee the lease.   Landlords do this because they know that a properly managed entity can provide liability protection to its owners, thus insulating them from claims for default on the lease.  Commercial landlords are savvy, and it is very common that they will require you to personally guarantee the lease.

All of these issues can create headaches, but preparing yourself for these hurdles and being proactive should keep the Big Bad Landlord at bay.  If not, seek the advice of qualified counsel.

Happy negotiating and good luck in your new business!

Gregory A. May, Esq. – www.kieselandmay.com

Michael Monnot

941.518.7138
Mike@infinitybusinessbrokers.com
1910 Park Meadows Drive, Suite 202
Fort Myers, FL 33907

https://infinitybusinessbrokers.com