Selling a business with a commercial existing Lease terms
What is an Assignment and what does it involve?
What is an Authorised Guarantee Agreement?
An Authorised Guarantee Agreement (often referred to as an ‘AGA’ amongst solicitors) is a document that the Assignor signs with the Landlord to guarantee the Assignee’s performance of the lease obligations, known as lease covenants. These include the payment of rent and compliance with repair obligations, etc. In the event of the Assignee defaulting on such obligations, then the Landlord may pursue the Assignor for any losses suffered and/or require the Assignor to take back the Lease. The AGA provides the Landlord with important protection and collateral, which gives them some comfort when granting consent to an Assignment. The Assignor’s liability under the AGA will come to an end when the Lease term expires or when the Assignee assigns the Lease to a third party (whichever happens first).
What happens if the Buyer is not happy with the existing Lease?
If there is insufficient time left on the existing Lease term or the Buyer is generally not happy with its terms, the Buyer may wish to try and negotiate a new Lease directly with the Landlord to tie in with the purchase of the business. Of course, the Landlord is not obligated to do so, and can simply say ‘no’. However, in some cases, it might be in the Landlord’s interests to agree new terms with an incoming Tenant as a couple of the potential benefits to the Landlord are as follows; (i) the opportunity to agree a fresh, lengthy contractual term, and (ii) the opportunity to welcome a new Tenant who is likely to be injecting fresh energy and money into the business and its premises, thus giving the premises a new ‘lease of life’ and possibly enhancing their freehold asset value. The benefit to the buyer in these cases is that they can agree a longer Lease term, so that they have a more saleable business should they decide to sell it. Also, they may be able to agree terms in the new Lease that may not have been a feature of the existing Lease, such as a rent-free period (to allow for fit-out) or a tenant-only break-clause (to give the buyer a ‘get-out’ if their business is not successful).
Key points to take-away
For Business Sellers: Be aware that you shall need to approach the Landlord for consent before you can lawfully sell your Leasehold business. Understand your obligations as an Assignor, particularly those contained in the AGA. Instruct a solicitor to guide you through the process. For Business Buyers: Do your homework in advance and read the existing Lease. If you are not happy with its terms, try and see if you can negotiate a new Lease with the Landlord to tie in with the business purchase. Instruct a solicitor to guide you through the due diligence and all the documentation required. To speak to the author of this article, Ashley Gurr, or for expert advice on any business legal matter please do enter an enquiry or call us today on: 020 7148 1066 and speak to a member of our friendly Client Care Team.
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