Overlooking the commercial lease when buying a business can be a dealbreaker. Whether exiting a business later on down the track, or buying or creating a new business venture, the lease and its terms impact the sale, and what you are taking on. Turning your mind to the lease early in the purchase process can significantly improve the risk of deals falling over, and a smoother transition.
It’s normal to be excited when buying a business, and starting out. We see it often: starry eyes and emotions. But rushing into prematurely signing a business sale and purchase agreement, and paying a deposit, before getting legal advice on the agreement terms, the business itself and the commercial lease that houses the business, can lead to significant problems down the track. Critical issues can arise during the due diligence process and the buyer’s legal position may not be able to be wound back should those issues become too severe.
Leases are one of those critical issues: hidden clauses and obligations that may create long-term challenges, including reinstatement, reassignment, rent reviews and a landlord’s consent.
Reassignments are rarely straight forward: a landlord may want to assess the buyer’s financial position, and require security in the form of personal and Bank guarantees before giving approval. This may cause delays and uncertainty and if not managed early, may delay settlement or even derail the transaction entirely.
Sellers should proactively engage with landlords early in the sale process. Purchasers should actively enquire into the consent process between the seller and the landlord.
Key Areas to Review
Rent Reviews: Buyers should assess whether rent reviews are based on fixed annual percentages, CPI adjustments or market rent valuations. The latter, especially, can lead to unexpected cost increases and affect business profits.
Outgoings & Expenditure (OPEX): These are operating expenses that a landlord typically passes onto a tenant and can include: insurance, Council rates, water rates, required maintenance for building warrant of fitness i.e. fire drills, or lift maintenance, and body corporate fees where the property is a unit title. Before signing, obtain a current statement of outgoings from a seller and review thoroughly.
Alterations and Reinstatement: These terms can add financial risk to a business and should be reviewed closely to understand what a landlord requires during, and at the end, of a lease. For example, replace flooring, walls, removal of fit-outs and restoration of the property to the original layout (i.e. make good).
Where this is a reassignment of lease, it is imperative that the buyer understand what the original layout of the property was at the time the seller first entered into the lease. Where a business is being sold by an agent, it is likely this information is available to potential buyers.
Information is Knowledge
The bottom line is: know what you are taking on before purchasing a business. Buyers should always obtain a full lease history, enquire into and obtain any notices of breaches and compliance issues, and confirmation rent is paid up to date, including OPEX, and ascertain what restrictions are currently in place i.e. signage, new fit-outs and whether the landlord permits changes to the current layout and what happens to your lease if the property is sold.
Lease Review Condition: Buyers should insist that conditions are inserted into the business sale and purchase agreement for their benefit and that allow an opportunity to undertake a detailed review of the lease, and other matters.
The best way to achieve this is to ensure your lawyer gets to review the lease documents and the business sale and purchase agreement before you sign it. Your lawyer will insist rigorous due diligence conditions are inserted to protect your legal position when buying a business.
Phone us on (07) 242 0751 or email us via our website www.ginajansen.co.nz to chat through your situation.
DISCLAIMER: The content of this article is not to be re-used without the express permission of the author. The information contained in this article is current as at the date of publishing, and is of a general nature intended to be a guide only, and is not a substitute for specific legal advice. Please contact Gina Jansen Lawyers for specific legal advice.
