Purchasing a Business – The Lease

When buying an existing business, it’s essential for purchasers to ensure that the agreement of purchase and sale includes a condition that the transaction depends on the landlord’s consent. If the transaction is structured as an asset sale, the landlord’s consent will be required to assign the existing lease to the buyer. In the case of a share sale, many leases stipulate that landlord consent is necessary if the sale leads to a change in the effective voting control of the corporation—or even simply a change in ownership.

While buyers often focus on the financial aspects of the lease, such as the minimum rent and TMI (taxes, maintenance, and insurance), it’s equally crucial to include a provision for the buyer’s solicitor to thoroughly review the lease. Here are some key elements to consider:

Demolition or Renovation Clauses

Tenants generally have the right to quiet enjoyment of the premises as long as they comply with their lease obligations. However, some leases include a demolition or renovation clause, which allows the landlord to terminate the lease with a set notice period if they plan to demolish or renovate the building, rendering the premises unusable for a period of time. This can be a significant issue for buyers if the business location is crucial, as it could lead to disruptions or even require relocation.

Exclusive Use

Depending on the business type, it may be wise to check whether the lease includes an exclusive use clause. This clause restricts the landlord from leasing other units in the shopping center to businesses that would compete directly with the tenant’s operations, providing assurance that a competitor won’t set up shop next door. The wording of this clause is important—landlords typically prefer narrow language to avoid overly restricting their ability to lease to others, while tenants usually prefer broader language to cover a wider range of potential competitors. If the existing lease lacks an exclusive use provision, it’s worth asking for one, especially while you have the landlord’s attention.

Assignment Clause

The assignment clause is the main reason why buyers and sellers need to obtain the landlord’s consent. A typical clause might state, “The Tenant will not effect or permit a Transfer without the consent of the Landlord, which consent shall not be unreasonably or arbitrarily withheld.” Here, “Transfer” is often broadly defined to include lease assignments, subleasing, and any sale resulting in a change in the effective voting control of the corporation.

The phrase “consent shall not be unreasonably or arbitrarily withheld” is crucial because it ensures that the landlord cannot deny the transfer without a valid reason. Typically, the landlord will request financial information, business experience, and references from the buyer to assess their ability to fulfill lease obligations.

It’s common for leases to require the tenant to cover the landlord’s administrative and legal fees related to the consent request, which can amount to thousands of dollars. This cost is often overlooked by buyers and sellers until the assignment agreement makes it clear that the landlord’s consent is contingent upon these fees being paid.

Additionally, some leases allow the landlord, as a condition of providing consent, to adjust the rent to the current market value at the time of assignment. In less tenant-friendly leases, the landlord may even be permitted to change other lease terms, creating uncertainty for both buyers and sellers.

Conclusion

When purchasing a business, it’s important to view the lease not just as a financial obligation but as a key asset of the company. Even if the landlord doesn’t exercise their rights under these clauses during your ownership, these terms could become a concern for future buyers if you decide to sell the business later on. The significance of specific lease terms will vary depending on the nature of the business, so a thorough review is essential.