When you are negotiating for the sale of your business with a purchaser, you are often requested to transfer the benefit of your existing commercial lease to the purchaser as part of the sale transaction. So when the transaction is completed the benefit of your lease is transferred to the purchaser along with such other things as the equipment and the business name.
There is an established legal principle which it seems many people do not fully appreciate and that is, that when a tenant as original lessee transfer its business lease to a purchaser, the various obligations under the lease remain with the tenant even after the transfer of the lease to the purchaser on the completion of the transaction. This is so, even though the purchaser, being the new incoming lessee has signed a document with the landlord (lessor) to agree to take on the obligations of the lease.
This scenario, especially when times are tough in business, could become an issue in the event that the purchaser fails in the business and breaches the lease (e.g. is unable to pay the rent) in which case the lessor, at law, is entitled to chase up the original lessee for the arrears.
It is therefore important that a vendor in such a situation attempt to negotiate with its lessor or landlord to be released from the terms of the lease on completion of the transaction.
Sometimes landlords are not happy about doing this but all attempts should be made to secure such an arrangement.
Quite often a vendor owns the business in the name of a company. In such a case, the lessor has probably requested that the director, or other officer of the company, personally guarantee the obligations under the lease. Furthermore, the terms of the lease often specify that the obligations of the guarantor will extend beyond a transfer of the lease to another party and in fact, sometimes beyond that particular lease term and into an option period.
Here again, care should be taken and all efforts be made to negotiate with the landlord for a release of the obligations of the guarantor upon the completion of the transaction. After all, the lessor/landlord will be calling for a new guarantor to come on board to support the incoming lessee.
If the business to be sold is a “retail shop” as so designated under State legislation, then there are provisions in such legislation to address the above issues regarding the release of the lessee or any guarantor from the obligations of the lease on completion of the transfer of lease transaction.
In such a case, the legislation provides for a procedure by way of disclosure by the vendor (or outgoing lessee) whereby if certain steps are followed, both the lessee and the guarantor will be released whether or not the lessor consents.
This procedure can be somewhat tricky to tie in with the transaction but comes down to the preparation of disclosure documents, relating to the lease provisions and to the business, which are prepared, signed and served on both the purchaser and the landlord at least seven days before the completion of the lease transfer.
If you would like assistance with an assignment of lease or have any questions about your sale or purchase transaction, get in touch with our experienced commercial property lawyers.
# For retail shops see Retail Leases Act 1994 sections 41 and 41A.
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