When buying a business it is fundamental to consider what you are actually buying. If you are not buying the freehold of the property where the business is located then you should pay particular attention to the terms of the lease of that property.
The transfer of the lease from the owner of the business to the purchaser is called an Assignment of Lease. The following issues should be considered as part of the transfer of the lease:
Commercial Lease Terms
The length of the lease (and if there are any options), the amount of the rent and how/when it is reviewed and outgoings payable are the major issues that need to be considered.
The amount of rent should be carefully considered and the method by which it can be reviewed during the term of the lease. The three most common methods of review are Consumer Price Index increases, fixed increases (ie 2% per annum) and market reviews (whereby the parties try and agree on what the market rent is and if they can’t agree a valuer is appointed to determine the rent). Market reviews generally apply on exercising an option to renew the lease. Landlords do not like rent to decrease and often the lease contains what is known as a ‘ratchet’ clause that provides that the rent cannot decrease on a market rent review. It is important to note that in Tasmania (and most other states) ratchet clauses are not allowed in retail leases.
Consent of the Landlord
Most leases require the current tenant to apply in writing to the landlord to consent to the assignment of the lease.
Commercial leases usually provide that the landlord can refuse to assign a lease because the new tenant does not have the financial capacity to pay the rent or is not a respectable responsible person. It is also open to the landlord to impose reasonable conditions on giving consent. Such conditions can include requiring the new tenant to provide personal guarantees, security deposit or a bank guarantee.
The landlord or the landlord’s agent should be contacted early on in the sale process to find out what information the landlord requires about the purchaser. Information required by a landlord is usually made up of trading history and a statement of assets and liabilities so that the landlord can assess the purchaser’s ability to pay the rent and comply with the terms of the lease.
Landlords will generally require the current business owner to pay the landlord’s legal costs associated with the assignment of the lease. The current owner and purchaser often separately agree to share the landlord’s costs, this would normally be documented in the business sale agreement.
From our experience, communication between the business owner, purchaser, landlord and the solicitors and agents is important to ensure that the business sale proceeds smoothly and without undue stress.
Cormiston Legal, a Launceston based Tasmanian law firm, deals with all aspects of business sales in Tasmania. Whether you are a buying or selling a business or are the landlord, please contact us on 03 6332 9353 to discuss how we can help.
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