In this article I address the importance of ensuring necessary commercial leases are preserved following a business sale. For information on other issues and concerns in a business transfer, please see my article, Buying or Selling a Business in Maryland.
For many businesses, the business location is its most valuable asset. This remains true even if the company only leases the location. Therefore, maintaining the right to use the property following the transfer is of utmost importance. If the lease is valuable to the buyer, it should not be assumed the seller has the right to sublease or assign the lease to the buyer.
As early as possible, an attorney should review any lease agreements and should contact the landlord to gain approval for a sublease or assignment. Generally, lease agreements will not permit a sublease or assignment, but do not lose hope. First, the lease agreement often allows a business to retain the lease if the business entity’s ownership changes. Second, the landlord may be more willing to allow a sublease or assignment than the landlord’s lease agreement indicates.
In addition, the buyer should note any limitations in the lease agreement on the tenant’s permitted uses of the property. If not permitted, your dream to change the current coffee shop into a coffee & oil change shop may be dashed.
There are notable differences between a sublease and assignment, and the buyer and seller should be aware. A sublease is typically a continuation of the current lease, with the seller/tenant remaining responsible should the buyer/subtenant default or otherwise create a liability. An assignment is an agreement between all parties (current tenant, new tenant, and landlord) that the lease will, going forward, be between the new tenant and the landlord. An assignment may relieve the former tenant of liabilities for the lease, but, ultimately, the written agreements between the parties will dictate the terms.
If the lease does not readily permit a sublease or assignment, negotiations between the seller, buyer, and the landlord may permit a discussion of the future lease price, term, uses, etc. Of course, depending upon each party’s power, this may be either favorable or unfavorable. The transfer of a lease can have tax ramifications as well, so your attorney should be notified of both the assignment and any changes made to the agreement.
Even if not required, it may be advisable to have the seller, buyer, and landlord sign a document acknowledging the sublease or assignment. When leased real estate is an integral asset of the business, an abundance of caution is warranted.
For further information, please contact Jeff Rogyom at (410)929-4578.