Your lease could cost you the sale
Premises are a common reason a sale falls over, and one of the easiest to fix early. What buyers, banks and landlords each need from your lease.
General information only, not financial, legal or taxation advice. Tony Pope holds Queensland Office of Fair Trading licence 4963575.
The short version
- A buyer needs security of tenure for at least as long as their finance runs, which is commonly five years.
- A lease with two years remaining and no option is a genuine obstacle to a sale, not a detail.
- Landlord consent to assign is required in almost every lease and the landlord is not obliged to be quick about it.
- Renegotiating term or exercising an option is far easier before going to market than during a sale.
- Rent well above or below market both create problems, in different ways.
Premises rarely make anyone's list of things to sort out before selling, and they are one of the most common reasons a sale stalls or dies. The good news is that this is among the easiest problems to fix, provided it is dealt with early.
What a buyer needs
Security of tenure for at least as long as their finance runs. If they are borrowing over five years, a lease with two years left and no option is a serious problem. They are being asked to commit to repayments on premises they might not have.
This applies with even more force where the location is part of the value. A workshop with the right zoning, hardstand and access, or a retail site with the right passing trade, cannot simply be moved.
What the bank needs
Lenders apply this independently and often more strictly than the buyer would. It is entirely possible for a buyer to be comfortable and their bank to decline, and that is the version that wastes the most time, because it usually surfaces late.
What the landlord controls
Almost every commercial lease requires landlord consent to assign. Most say consent will not be unreasonably withheld, which is helpful but not the same as quick.
The landlord will want to assess the incoming tenant, which means financials, references and often personal guarantees. They may want the outgoing tenant to remain liable for a period. They may take the opportunity to renegotiate. And they will take as long as they take, which is regularly four to eight weeks and can be longer.
Where a business is in a retail shopping centre, expect this to be slower and more involved again.
The problems worth checking now
Short remaining term with no option. The most common and the most damaging. Talk to your landlord about extending or adding an option before you go to market, while you have no urgency and therefore more leverage.
Rent well above market. A buyer prices this straight into the earnings and it reduces what they will pay.
Rent well below market. Sounds like an advantage and often is not, because a buyer will assume it corrects at renewal, and the landlord may take assignment as the moment to correct it.
Make good obligations. An expensive make good clause is a liability the buyer inherits. Know what yours says.
Personal guarantees. Yours may not release on assignment. Read the clause. Owners are regularly surprised to find they remain on the hook after settlement.
No written lease at all. More common than you would think, particularly where the landlord is a relative or a long standing contact. A handshake is not something a buyer can finance.
If you own the premises
You have a decision rather than a problem. Sell the business and the property together, sell the business and lease the property to the buyer, or sell them separately. Each has different tax and price consequences, and it is worth working through with your accountant before going to market rather than after an offer arrives.
The practical step
Read your lease. Note the expiry, any options, the assignment clause, the make good, and any guarantee. If the remaining term is short, start the conversation with your landlord now.
It is a quiet, unglamorous piece of preparation, and it has saved more sales than almost anything else on the list.
Common questions
Can I sell my business if I lease the premises?
Yes, and most business sales involve leased premises. What matters is the remaining term, whether there are options to renew, and whether the lease can be assigned to a buyer. A short remaining term with no option is the most common lease problem and it is worth solving before you go to market.
Does my landlord have to approve the buyer?
Most commercial leases require the landlord's consent to an assignment, and the landlord is usually entitled to assess the incoming tenant's financial standing and experience. Consent generally cannot be withheld unreasonably, but the process takes time and it needs to be started early rather than at settlement.
How does a short lease affect the price of my business?
It reduces certainty for the buyer and their financier, and reduced certainty discounts price. A buyer funding a purchase over five years wants to know the premises are secure for at least that long. Negotiating a renewal or an option before you list is one of the cheapest pieces of value protection available.
Keep reading
All notes on selling a business · All seller guides · What is my business worth?
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