In many acquisitions the decisions must be made whether it is preferable to assume the seller’s existing lease or new lease. It may be better to assume the present lease, provided the present lease has more favorable rents and other concessions than would be anticipated under a new lease; and the present lease has a sufficiently long term remaining. In fact, the benefits of a lease assumption may justify increasing the price of the business.
From the seller’s viewpoint, the lease assumption offers both the same benefits as well as the potential risk of liability if the buyer defaults under the lease.
The buyer and seller must each qualify the benefits and the risks. The buyer will need to accurately measure the anticipated rent savings and consider further both the burdensome and beneficial features available through both the present and new lease.
While the seller’s benefit to a lease takeover may be translated into a high price for the business (or other concession), the risk of liability remains speculative, unless the buyer has sufficient financial strength, or the seller stands ready to reoccupy the premises in the event of a buyer default as subtenant. The risk may be further reduced through indemnifications issued by the principals of the buyer corporation or parent corporations where the buyer is a corporate subsidiary.
To consider a lease assumption, the present lease must offer a remaining term (including options) comparable to what would be required under a new lease. Oftentimes the remaining term is not of sufficient length, yet offers very favorable terms for the few years remaining. Faced with this situation, negotiate a new lease to commence upon the expiration of the present lease.
The major roadblock to the lease assumption is generally the non-assignability of the lease. Few leases allow the tenant to assign the lease without prior landlord approval. Many leases incorporate the language, however, that “the landlord shall not unreasonably withhold consent”. The law is unclear as to when a landlord may withhold consent. Nevertheless, the threat of legal challenge may be sufficient to negotiate more favorable terms on a new lease than would otherwise be obtainable.
Where the seller is a corporation, the problem of a non-assumable lease may be best resolved through an acquisition of corporate shares. Many small businesses transferred through stock acquisitions for precisely this reason.
When the lease is to be assigned without the need for landlord consent, the buyer should verify that the lease is in good standing and as represented. The seller would provide these warranties under the contract, however, independent verification should be requested.
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