Am I Still On The Hook For My Lease After I Sell My Business?

By Kelly Cunningham

Most people don’t know that when you sell your business and assign your Lease, you are not always off the hook for the remaining Lease liability? What to do to ensure that your Lease doesn’t stay with you when you sell…

If this has raised some questions, please read on …

BACKGROUND: Michael has been running his food business for eight years in a shopping precinct in regional NSW. Michael has decided it is time to retire, as he is approaching 65 and feels he has had enough. He has another two years to go on his Lease, but has a five-year option available, meaning there is another seven years of life in the Lease, available for a buyer, which he thinks will be attractive.

A BUYER IS FOUND: Michael speaks with a business broker and asks for help to find a buyer. Within a few weeks, he has secured a buyer. Things are coming together nicely, and retirement is only a few short weeks away. As standard procedure, the Landlord needs to approve the buyer and consent to the transfer of the Lease to the buyer.

Michael meets with the Landlord and lets them know that he is selling his business and he has found a really great buyer, who seems to fit the bill, with experience in food and the money to buy the business. He shares that even though the buyer is a lot younger than Michael, he sees this as an advantage, as he feels it will be great to have some younger energy in the business, to take it to the next level.

The Landlord approves the buyer and is also comfortable that the buyer is suitable to take over the existing Lease, by way of an Assignment of Lease. This means that the buyer takes over all of the terms and conditions of the existing Lease, exactly as they stand, including the rental commitments. Michael is feeling very pleased. He is happy that his business of eight years is in good hands and he can now retire.

A SLIP-UP IN DOCUMENT PROCEDURE: The Landlord provides Michael with an Assignment of Lease document, as well as a Landlord’s Disclosure Statement. Michael takes the Assignment of Lease document to the buyer and asks them to sign it, providing them also with a copy of the current Lease. Michael doesn’t share the Lessor’s Disclosure Statement, as he has read through it and feels that it is just the same information as the Lease, a duplicate which is not needed.

The Assignment of Lease document is only a three-page document, which is fairly simple to read, so Michael feels that with his experience, he can finalise this document himself and save money on a lawyer.

The Assignment of Lease and the sale documents are signed by the buyer, when Michael reconsiders sharing the Landlord’s Disclosure Statement and gives it to the buyer, just for his information. “It is just the same information as the Lease, but you may as well have it”, he said, and Michael goes out to celebrate. The end of an era! Retirement, here I come!

RETIREMENT OVER AND BACK TO WORK: Fast forward three years, Michael is enjoying retirement. The buyer has been operating the business happily and has exercised the option to stay for the next five years, with four years still left to go.

AN UNEXPECTED CALL: Michael receives a call from the Landlord of his old business to say that they would like to meet. As you can imagine, he is confused! Me, why me? I no longer own that business! I sold it three years ago.

Michael is right, he did sell the business three years ago, but when he was finalising the documentation, he failed to share the Landlord’s Disclosure Statement with the buyer within the set timeframe and if you remember, he thought it was a double up and not necessary, only casually sharing it at the end, once everything else was signed.

He finds out that the new owner of the business has had a family emergency and had to unexpectedly return overseas, leaving the business closed and not paying the rent. The Landlord has cashed the security deposit, but hasn’t been able to recover enough, so are now looking to the original Lease holder to step in.

BACK TO WORK: Unfortunately, due to Michael not following the set process outlined by the Retail Leases Act, including the sharing of the Landlord’s Disclosure Statement with the buyer, seven days prior to assigning the Lease, he remains liable for any amounts payable under the Lease until the end of the term (another four years!)

It is important to know as well, that this liability also extended to Michael’s wife, Lola, as she was a personal guarantor under the Lease.

WHAT CAN WE LEARN FROM THIS CASE STUDY?

• When selling your business, ensure you get Landlord consent to assign the Lease.

• Use a lawyer to review all the documents and ensure you have complied with all the necessary paperwork, within the set timeframes.

• Comply with the Retail Leases Act provisions for assignment, to avoid being left attached to the Lease, after you have sold the business (these requirements may vary state to state, so check your local legislation).

CAN MY LANDLORD SAY NO TO MY BUYER?

Yes, your Landlord can say no to the assignment of the Lease on the following grounds:

• The buyer wants to change the use of the premises.

• The buyer is not suitably experienced.

• The buyer does not have the equivalent financial capability that you do.

HOW CAN WE WORK AROUND THIS ?

Yes, there are some things you can try to negotiate to assist if you have issues gaining Landlord consent, depending on the reason:

• The seller agrees to stay working at the business for an agreed period of time, until the buyer becomes suitably experienced.

• The buyer provides a bigger than usual security deposit to the Landlord, so that the Landlord can be more comfortable with their financial risk.

• The seller can stay on as a guarantor under the Lease (not recommended)

If you are about to sell your business or are looking to assign your Lease, feel free to call us on our FREE phone hotline 1300 356 702 or email us to discuss the process for interacting with your Landlord and what our tips are to avoid finding yourself in this situation!