The last thing you want to have to deal with during the potential sale of your business is a hiccup that has little to nothing to do with your business—your landlord! To help ensure your landlord does not have the power to affect the sale of your business, you should properly negotiate the assignment and sublease clause in your lease. A few things to negotiate or consider…
DURING LEASE NEGOTIATIONS
Remove the recapture clause
The recapture clause refers to a lease provision that allows the landlord to terminate a lease and retain possession of a property. Keep an eye out for this clause and negotiate removal. It may be difficult if you are a small tenant in a big building, but it is worth the effort to discuss.
- If you are unsuccessful in having the recapture clause removed, use verbiage to limit the landlord’s right to recapture only in the case that you no longer need the space and sublease it, and prohibit recapture in the case of an assignment associated with a business sale. In some cases, you can negotiate under what conditions you can assign the lease (i.e., a related entity or an entity with higher net worth).
- Make sure the lease states that the landlord’s approval “shall not be unreasonably withheld or delayed.”
- Liability: Typically, the tenant remains fully liable even if the lease is assigned or subleased. However, if selling the business, you may be able to waive this issue if you offer the landlord something beneficial to them—more leased space or a longer-lease term.
- NOTE: A transfer of stock qualifies as an assignment in most leases where the tenant is not publicly traded.
Be aware of any “exclusive use” clauses that may exist for other tenants
This element is more common in retail properties but is occasionally a factor in an office building. An exclusive use clause means the landlord gave them the right to be the only bank, mortgage company, shoe store, etc. in the building.
Sublease review fees
Most leases now give the landlord a right to charge to review a sublease or assignment. In many cases, they can charge attorney fees on top of their fees. Try to renegotiate these terms before signing your lease.
ONCE YOU DECIDE TO SELL
Communicate your intentions
Give notice early but avoid false alarms! Let your landlord know as soon as you have confidence that the sale will go through, but do not go to them every time you have someone with an interest. Also, let them know why you are selling. It always helps when the landlord understands the reasons for something you request. Explain the structure of the transaction and why it may be good for them.
Inquire about your landlord’s approval process and ask for their preferred consent form. Landlords will rarely sign a consent form created by your broker or you, so get ahead of the process and use their form; have it signed by the primary tenant and the subtenant when the sublease is signed.
Have the acquiring company sign a new lease (if possible)
To sign a new lease for the same space, the landlord must terminate your current lease—which is usually the goal of the seller! However, the landlord most likely will require something they want in return—stronger credit, more leased space, or a longer-term lease.
Include an indemnity clause in your sale documents
If your landlord does not allow you to be removed from future liability, make sure your business sale documents include a buyer’s indemnity of the seller.
You should always consider your future business goals and objectives before you sign a lease, and make sure the lease document is compatible with those goals. Negotiations will land much more in your favor when the landlord is trying to woo you into their building than when they already have you and you are wanting to leave!