If you’re considering buying or selling a leasehold business, one of the first things you’ll have to think about will be the lease itself. What are your options, and what procedures will need to be followed? This guide addresses some of those key considerations to help you navigate this important area of business law.
What is a leasehold business?
A leasehold business is one in which you own the lease of a building for a fixed period of time. A leasehold business can provide an affordable way to gain access to the premises needed to operate a business but with the ownership of the property remaining with the Landlord. At the same time, the Tenant benefits from exclusive use of the premises.
This arrangement can be ideal for those looking to start a business without committing to the financial burden of buying a commercial property outright. With the right Lease Agreement in place, a leasehold business can provide a secure and cost-effective option for entrepreneurs.
Selling a business with a commercial lease
The first thing for both parties to consider is the length of term remaining on the existing Lease and its current terms (i.e. rent, rent reviews, break clauses and repair obligations, etc).
If the remaining term is for a reasonable amount of time, and the buyer is otherwise happy with the Lease Terms; then it’s likely that the transfer will proceed by way of an assignment of the existing Lease, which will complete simultaneously with the sale/purchase of the business.
What is a lease assignment and what does it involve?
A lease assignment is a legal process whereby the outgoing Tenant (known as ‘the Assignor’) transfers their existing Lease (including all its rights and liabilities) to the incoming Tenant (known as ‘the Assignee’) with the Landlord’s formal consent.
The Landlord is likely to do his due diligence on the Assignee in advance (to ensure they will be a good Tenant), which is likely to involve such things as sight of previous trading accounts, bank references, trading references, possibly credit checks, etc.
The Landlord will typically require independent legal representation during this process and the terms of the Lease would usually require the Assignor to meet the Landlord’s legal costs in respect of their application for consent.
The granting of the formal consent is via a document called the ‘Licence to Assign’. On a modern Lease, the Landlord is also likely to require the Assignor to enter into an Authorised Guarantee Agreement.
The Landlord may also require additional collateral from the Assignee, perhaps in the form of a Director’s personal guarantee (where the Assignee is a Limited Company) or a Rent Deposit, particularly where the Assignee is a ‘Start-Up’, or the Landlord has concerns as to the Assignee’s solvency, trading history or lack of suitable references, to name but a few.
Alternatively, the Landlord may lawfully refuse their consent to an assignment whereby they have valid reasons to do because of such concerns.
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’s 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 on new terms with an incoming Tenant as a couple of the potential benefits to the Landlord are as follows;
- The opportunity to agree to a fresh, lengthy contractual term, and
- 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 to 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 on 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
Selling a leasehold business
Be aware that if you’re selling a business with a lease you shall need to approach the Landlord for consent before you can lawfully do so. Understand your obligations as an Assignor, particularly those contained in the AGA. Instruct a solicitor to guide you through the process.
Buying a leaseholder business
When buying a business, you need to do your homework in advance and read the existing. lease. If you’re 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.
Get legal assistance from LawBite
We understand that buying or selling a leasehold business can be complex. If you need help with the purchase process or you’re looking to have an AGA reviewed or drafted, book a free 15 minute consultation with one of our expert property lawyers or call us on 020 3808 8314.