What Happens to My Lease When I Sell My Business?

Selling your business is a significant milestone, but it’s important to understand the implications for your commercial lease. This blog will guide you through the two most common processes: assigning (transferring) your lease to the buyer, and what happens if your lease has expired. We’ll also discuss other key considerations to keep in mind to ensure a smooth transition for all parties. You should remember that there are three (3) key parties to consider when selling your business: 1) The Landlord, 2) You (the Tenant) and 3) the Buyer (who will become the Tenant once they have purchased your business).

Assigning (Transferring) Your Lease

When you sell your business, the buyer will likely want to continue operating from the same premises. This means you’ll need to assign (transfer) your lease to the new business owner. Here’s what you need to know about the process of a lease assignment:

1. Obtaining Landlord’s Consent

  • This is the First Step! We find a common mistake is that tenant’s sell their business, sign a Contract, and only then ask the Landlord to consent to assign the lease. This creates a legally precarious position, as the Landlord might not approve your buyer to become their new tenant.
  • The buyer must provide the Landlord (or the Landlord’s Agent) with their financial information and professional experience, essentially completing a lease application for the landlord’s review and approval or refusal.
  • Again, the landlord’s consent is required before the lease can be assigned. While landlords cannot unreasonably withhold consent, they can deny it if the buyer does not offer the same or better financial security, or if the buyer’s professional experience is not comparable to yours.

2. Legal and Financial Obligations

  • Once Landlord’s consent has been obtained, a legal Assignment (Transfer of Lease) will need to be prepared by your solicitor (this is also commonly prepared by the Landlord’s solicitor) and then executed by the Landlord, you (as the outgoing tenant) and the buyer (as the incoming tenant).
  • The costs associated with the lease assignment, such as legal fees, are generally your responsibility. It’s crucial to budget for these expenses in advance. Make sure you ask questions to understand your obligations.

3. Process Timeline

  • There is no set timeline to process an Assignment of lease. The timing can be impacted by how quickly all the relevant information is supplied (for Landlord consent), the responsiveness of the parties, and what type of lease is being assigned (eg. a Retail Lease may require additional steps, taking more time).
  • The lease assignment process can take longer than expected, so patience and thorough preparation are key. We recommend you speak with your landlord, or landlord’s agent early in the process and keep in regular communication during the process to ensure all parties are on the same page at all times.

 

If Your Lease Has Expired

It may not be practical to assign your lease if it has already expired (and you occupy the premises on a ‘month to month’ basis). If your lease has expired, the buyer will likely need to negotiate a new lease with the landlord to remain in the premises. Here’s what to consider in this situation:

1. Negotiation of New Lease

  • The buyer must negotiate new lease terms with the landlord. This process involves assessing the buyer’s suitability as a tenant. This is similar to one of the steps in the assignment process, but may be based on different criteria compared to a lease assignment.

2. New Lease Execution

  • If/when the buyer of your business is approved as a tenant, a new Lease between them and the Landlord will need to be prepared. This is most commonly prepared by the Landlord’s solicitor with the associated cost being paid by the new tenant (unless a Retail Lease, or unless they negotiate an alternate cost agreement).

3. Ending Your Lease

  • You must give formal (written) notice to the landlord that you are ending your lease. Typically, this requires one month’s notice under an expired lease, but always consult your lease agreement for specific details.
  • We recommend you discuss this process with your solicitor to ensure the correct process and appropriate timing are considered.

 

Key Considerations When Selling Your Business

Selling your business and dealing with your lease obligations involves more than the two common scenarios we have covered above. Here are some critical points to consider:

1. Make Good Obligations

  • Determine if you need to perform any works to restore the premises to its original condition (make good). Ensure the buyer understands their future obligations as well.
  • We recommend that make good obligations are clearly documented when you sell your business, so there is no dispute about which party is responsible for any required works (for works either now or that may arise in future).
  • 2. Final Rent and Outgoings Adjustments
    o Clarify the final rent and any outgoings you may need to make to satisfy your obligations under the lease. If you pay property outgoings in addition to your rent, these will likely need to be adjusted accordingly.

3. Bond or Bank Guarantee

  • Check if you have any remaining requirements to meet in order to get your bond or bank guarantee back. This may include completing any make good obligations, payment of any owed monies, and the incoming tenant having performed their obligations (including provision of bond / bank guarantee).

 

Additional Business Management Considerations

While this blog focuses on the common processes of dealing with your lease obligations, there are many other business management processes you may wish to consider when selling your business, such as:

1. Notifying Customers and Staff

  • Plan how to inform your customers and staff about the change in ownership.

2. Transition Planning

  • Work on a transition plan to ensure a smooth handover to the new owner, including having a firm agreement around any retention period, if any (this is the time frame for you to remain in the business after the sale is completed).

 

Our key tips to follow:

  1. Advise your Landlord / Agent early in the process when selling your business. This should be done BEFORE you have made any agreement to sell your business.
  2. Be patient, as the process will likely take longer than you expect. Selling a business and transferring a lease is a complex process that involves many steps, but with careful planning and professional advice, you can navigate it successfully.

 

Conclusion

Understanding your lease obligations when selling your business is crucial. Whether you’re assigning your lease to the buyer or they are negotiating a new lease if yours has expired, being prepared and informed will help ensure a smooth transition. Always consult with legal and real estate professionals to guide you through the process and address any specific concerns related to your lease agreement.