Question 9: We are negotiating a new lease. Can you give some tips as to what we should be concerned with in signing a new lease and how it relates or will affect the sale of our business in the future?

Answer: This is a great question and deserves a thorough answer. Over the years without question, landlords or the lack of a transferable lease is the biggest reason a sale between a buyer and seller falls apart. When an owner is signing a lease, the transferability of the lease and the lease terms is often not considered. A lease is a license to operate your business at a certain location. It is certain that a new lease or lease assignment will be a part of transferring your business to a buyer. If you cannot transfer your lease rights to the buyer, or the buyer cannot obtain a new lease, it’s doomsday for the sale. To sell you often need additional options or a new lease. If the lease provisions give the landlord the unilateral discretion whether or not to accept the buyer as the new tenant, then the Landlord “holds all the cards”. This provides the Landlord the perfect opportunity to increase the rent or to refuse to enter into a new lease as he may have other plans for the space. Either way it will cost you. With a rent increase to the buyer, the cost of doing business goes up and may be unacceptable to the buyer and decrease the purchase price. Additionally, if the Landlord does not cooperate in providing a new lease or extending the term, the sale cannot close. Warning!!! Read your lease assignment clause. The following legal language is often found in leases. “Tenant shall not assign this Lease or sublet all or any portion of the Premises without the prior written consent of the Landlord”. This type of provision or similar provisions gives your Landlord the unilateral right to decline a lease assignment, and puts the ultimate decision on whether or not you can sell your business at the Landlord’s discretion. Case in point. We have come across many situations where this was demonstrated. One particular instance there was a restaurant that had 3-years left on the lease and no options to renew. When we went to market, we were concerned about not only the length of the lease term, but also about the assignment clause. I gave the Landlord a call and introduced myself and explained that we were confidentially selling the business and would need a new lease or an assignment with options to extend in order to sell the business. At the time, the Landlord told me he was agreeable to both options, but wanted a qualified buyer. So, we took the business to market. We found a qualified buyer and one of the first steps was to assign the lease and provide for options to extend the length of the lease. As usual, the Landlord required that we provide him the buyer’s credit report, financial statement and resume. The buyer had excellent credit, years of restaurant experience and a decent net worth. I was shocked when the Landlord turned down the Buyer and also refused to negotiate a new lease. The Landlord claimed that the buyer was not qualified. No matter what was provided as evidence or what we induced the Landlord (including increasing the rent) with we were unsuccessful, and as a result the deal was terminated. Obviously, the Landlord had other plans for the space. He would not reveal to us any information other than he did not approve of the buyer. This however could not stop us from working to fulfill the needs of the Seller. We brought another buyer with 22 years of restaurant experience, excellent credit and a net worth of over $1 million dollars. Again, the Landlord made excuses for turning us down. There was nothing that we or the Seller could do. The fact is, we never found out why the Landlord was so uncooperative, but the Seller was left with a business he could not sell. Lease Tips: If you’re signing a lease insist on the following lease language; “Tenant shall not assign this Lease or sublet all or any portion of the Premises without the prior written consent of the Landlord, which shall not be unreasonably withheld”. (1) Avoid entering into a lease with base rental amount plus a “percentage of sales” rent (2) Make sure your annual rent increases are reasonable so you can keep your future expenses predictable. You should negotiate a cap that your rent increase cannot go beyond. (3) Before you sell your business make sure you have as much time left on your lease as possible. 5-years with a 5-year option is preferable or 10 years in total. Consider signing a new lease or new option prior to selling. (4) Over the years, keep a good relationship with your Landlord. If you’re on good terms, they’re likely to be more cooperative. A great majority of the time, Landlords cooperate and allow assignments or negotiate a new lease for the buyer that is agreeable to all and does not hinder the sale of the business. But wouldn’t you rather be sure.