Buying a business and the lease

When purchasing a business you should have a thorough knowledge of the details of all contracts that relate to the sale. One key contract is the lease of the premises.

Since most businesses are conducted in rented premises it is unusual to find a transaction where the premises form part of the assets. Sometimes, however, the vendor owns the premises. In this case, the purchaser must either buy the premises or enter into a lease with the vendor over the premises. In either case, the execution and, in the case of a purchase, the settlement of the contract must be co-ordinated with the transfer of the business.

In the majority of business purchases where you will be subject to a lease, it is important to ascertain at the outset whether there is a valid lease of the premises and the terms of the lease, such as what the balance of the lease term is; whether there is an option to renew; and how much the rental increases annually.

Assignment of existing lease

If there is still a lease period remaining the lessor is likely to assign the lease to the purchaser of the business. Obtaining the landlord’s consent to an assignment of the lease of the business premises will usually be a matter primarily for the vendor. However, the lessor will need to approve the incoming lessee.

Changes to the existing lease

I often get asked by purchasers about making changes to the lease when they buy a business. If the lease is assigned to you as part of the sale then you will generally have to comply with the existing terms of the lease. Depending on the circumstances, the lessor may be open to varying the lease. It is a good idea to get legal advice if you are seeking changes to the lease, prior to having it assigned. If variation to any of the terms of the lease is accepted by the lessor, the cost for the variation is generally borne by the purchaser.

New lease

If the lease has expired or nearing the end you will have to enter a new lease with the lessor. It is open for negotiation and you should get advice from a broker experienced with the subject business and area to help establish an idea of the rent and a lawyer to help you to negotiate the terms of the lease.

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