Whether you are the vendor or purchaser of a business, often the business will operate from a leased premises. The contract will inevitably provide that the sale of the business is conditional on the lease being taken over by (or a new lease granted to) the buyer.
As the vendor, you have a responsibility to initially request the landlord’s consent to the transfer of the lease or the grant of a new lease.
Transfer or new lease?
A transfer of the existing lease usually requires the buyer to be responsible for the obligations under the lease going forward. Unless there is an agreement by the landlord to vary the terms, it is important the buyer is aware of the obligations under the lease and comfortable with them, as they will simply stand in the shoes of the vendor from settlement and will take over the responsibilities as they exist (as if the buyer was originally named as the tenant).
If the contract is subject to the grant of a new lease, the buyer has more control over its destiny, as it can try to negotiate term, rent, options etc.
Considerations for the buyer
Whether taking over an existing lease or negotiating a new lease, the buyer should consider a couple of important provisions such as (this is not an exhaustive list):
- Make good – what obligation are you inheriting to remove any existing fitout, equipment and partitioning? This can be expensive.
- Demolition clauses – is the landlord entitled to terminate the lease if it decides to renovate or develop the premises? Are there any proposals to develop nearby property?
- Refurbishment and redecoration – how often are you required to replace carpets, repaint etc? Has this been done recently by the vendor or have you inherited that obligation?
- If it is an assignment of lease, has the landlord confirmed the vendor is not in breach of any terms?
- What security is required?
Release of liability of the Vendor
Conversely, from a vendor’s perspective it is important to ensure you are released from any ongoing liability under the lease (in your capacity as tenant and any personal guarantor). At common law, an “assignor” of a lease remains responsible for performance, even when they have sold the business and moved on so this needs to be dealt with in the assignment documentation.
In retail tenancies, there are certain automatic rights to be released subject to fulfilment of some conditions.
Where the buyer negotiates a new lease with the landlord, the vendor of the business will usually “surrender” their lease interest and will effectively be released by doing so.
At Nevett Ford, our corporate lawyers handles a lot of business sales and acquisitions and lease negotiations, including retail and commercial/industrial premises. Call us on 03 9614 7111 or email us at melbourne@nevettford.com.au to discuss your circumstances and let us help you navigate the path through to the optimal outcome for your business.