Navigating Lease Assignment Issues in a Small Business Acquisition

When buying a small business, a third party that often is very influential in determining whether an acquisition will close in a timely fashion (if at all) is the commercial landlord that owns the office building or shopping center in which the target business is located.  Assigning an existing lease or negotiating a new lease can be a challenging, time-consuming task and should not be taken for granted at any point during the process.  Here is a quick summary of some key lease assignment issues and considerations to keep on your radar screen.

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.