Buying a Business with a Lease? Don’t Make This Costly Mistake
Are you thinking of purchasing a company that operates on leased premises? Be careful. Buying a business with a lease comes with risks.
We once knew of a seller named “Sally.” Her small company ran out of a rented space in a government-owned building. When Sally put her business up for sale, she had two years left on her lease agreement.
An enthusiastic buyer named “Jack” made a successful purchase offer, due diligence was wrapping up smoothly, and Jack couldn’t wait to get the keys. He assumed all along that the lease could be transferred or renewed and wasn’t told otherwise.
Things went south when it came time to loop in Sally’s landlord from the government. The building was going to be torn down, said the official, because of a land redevelopment project already filed with the city and disclosed to the public. Therefore, the lease would not be renewed.
End of deal. After months of hard work, Jack walked away.
The lesson? If you’re buying a business with a lease, there’s a critical contingency that needs to be met before closing. So, what do you need to know about leases so you don’t end up like Jack?
Secure a Lease Agreement Before You Buy
What would you do if you bought a business and the landlord refused to either write you up a new lease or let you take over the existing lease agreement? Relocate or shut down—those would be your options.
You’ll probably want to keep running the business in the same location for the foreseeable future. You’ll also want to avoid nasty, unexpected rental increases.
During the buying process, ensure you will have a lease in place and you agree with its terms and conditions.
Did You Know...
If the landlord won’t transfer the lease or give you a new lease, to keep your business running you’ll be forced to relocate. Ouch! Always secure a lease agreement before you buy a company that rents its premises.
Can You Transfer a Commercial Lease?
Transferring a business lease to someone else is a common practice. However, in many instances, you’ll simply get a new lease. Be sure that one of the purchase conditions is either of the following:
- Renegotiated lease (new lease): The landlord will release the seller from the old lease and agree on a new lease with you. Your seller may prefer this arrangement because it relieves her of all obligations under the current lease and encumbers you directly.
- Assigned lease (transfer): You’ll take over the current lease agreement as is. Your seller may be wary about this arrangement because he may be stuck with obligations after the transfer.
When to Involve the Landlord
At what point in the buying process should you and the seller talk about the lease and let the landlord know what’s going on?
While you may ask your seller about the lease at any point, usually you won’t start talking with the landlord until after you’ve completed due diligence (or are nearing completion) and after you’ve secured financing. Why is this? Partly because the seller may want to conceal the sale from the landlord until the deal is almost done.
Did You Know...
The business broker represents the seller’s interests, not yours. As far as your lease goes, get professional advice from a commercial real estate agent, a real estate lawyer, or a leasing consultant.
Here’s Our Advice If You’re Buying a Business with a Lease
When you’re buying a small business, ask a professional for help in understanding all aspects of the lease. Talk with a commercial real estate agent, a real estate lawyer, or a leasing consultant.
And remember, as helpful as the business broker may be, the broker represents the seller’s interests, not yours. Given the conflict of interest, it’s best not to rely on the broker for lease advice.
Whether you’re buying a business with a lease in Toronto, in the GTA, or elsewhere in Ontario, enroll in our Business Buyer’s Brilliance program. Gain the knowledge, skills, and confidence you need to master every stage of a business purchase.
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