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What is a leasehold business?

Business premises may be freehold (the owner of the business is the legal owner of the property) or leasehold (the owner of the property leases the property to the business owner). If you are not buying the freehold to the property then you need to pay attention to the terms of the lease.

The technical legal name for the transfer of the lease from the business owner to the purchaser is called an Assignment of Lease.

A purchaser of a leasehold business should consider the following issues as part of the transfer of the lease:

Commercial Lease Terms

The important terms to consider in a lease are:

1. How long the lease has to run and if there are any options for further terms;

2. The amount of rent together with how and when it is reviewed; and

3. The outgoings payable such as rates and taxes (commonly referred to as statutory outgoings), water, power and any other charges that the land owner indends to pass onto the business owner for payment.

Length of Lease and Options

It is important to consider how long the lease has to run and whether there are any options for further terms. You may want a few options to ensure that you can operate your new business for many years before having to relocate. Without a lengthy lease or a number of options, your tenure at the premises may not be secure.

Rent and Rent Reviews

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.

Often a lease will contain 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.

Outgoings

You should check what outgoings you are liable for so that you can budget accordingly. It is common that in commercial leases the Tenant is responsible for statutory outgoings such as rates, taxes and TasWater charges.

Consent of the Landlord

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. 

Costs

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.

Communication

From our experience early and frequent 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. 

Whether you are a buying or selling a business or are a property owner, we can help. Please contact us on 03 6332 9353 or use our contact us form if you would like our assistance http://www.cormistonlegal.com.au/contact

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