Lease Assignment Issues in Small Business Acquisitions

When negotiating the acquisition of a small business, one of the most important issues to address during the due diligence process is confirming whether the current business owner owns or leases its business office or retail location. When the business operates from a leased location, the potential buyer and seller necessarily must negotiate with the third-party landlord to secure either an assignment of the existing lease or negotiate a new lease. Below will summarize a few key points regarding leasing issues in the context of a small business acquisition.

What is a commercial lease assignment?

A commercial lease assignment is an agreement or transaction that transfers an existing leasehold interest from a current tenant to a new tenant (i.e., a new lease is not negotiated, the buyer simply steps into the shoes of the seller and takes over the seller’s rights and obligations as tenant under the existing lease). The lease assignment process is a critical (sometimes contentious) part of the overall acquisition.

Does a Seller’s leasehold interest have value?

Absolutely. Ever consider what is included in the sale of an ongoing business? A business consists of a bundle of tangible and intangible assets (and liabilities), including customer goodwill, leasehold improvements, fixtures, signage, inventory, equipment, customer contracts, among many others. From a potential buyer’s perspective, the physical location of a business or, more specifically, the commercial lease associated with that location, is an important asset of the business. The terms and conditions of a commercial lease can have a significant impact on the overall value of the business.

Have you reviewed the lease?

The assignment clause is an important part of a commercial lease, and these clauses come in a variety of shapes and sizes. There may be conditions to an assignment such as notice requirements, personal guaranty requirements, increased deposits imposed on the seller (assignor) and/or the buyer (assignee). A business owner hoping to sell her business needs to plan ahead and fully understand the contractual terms and conditions of a lease assignment. Otherwise, a potentially lucrative transaction could get derailed due to landlord delays or interference with the lease assignment process.