Understanding Leases

Leases play a significant role in the buying or selling of businesses. When focusing on the higher profile particulars of a business it is easy to overlook the topic of leases. Leases cannot be ignored because they are a common feature of many businesses.

It is common that leases play a major role whenever a small business is sold. In general, there are three different types of leasing arrangements. Please note that if you have questions about your lease, you should consult with your attorney. The advice contained in this article shouldn’t be used as legal advice.

Lease Options

We will examine three of the most common types of leases. Each lease functions in different ways. It is important to note that each of these three classes of leases can have differing complicating factors, which again underscores the value and importance of working with an attorney.

Sub-Lease

The sub-lease is a lease inside of a lease. When a seller sub-leases a property, it means that the seller serves as the landlord. However, please note that the initial landlord still has a binding agreement with the seller. This type of lease requires the permission of the initial landlord.

New Lease

A new lease is created if the previous lease on a property expires or is in need of significant change. The buyer works directly with the landlord and terms are negotiated to create a new lease. Usually an attorney drafts the new lease.

Assignment of Lease

The most common type of lease used when selling a business is the assignment of lease. This type of lease provides the buyer with use of the premises where the business currently exists. In this type of lease the seller “assigns” all rights of the lease to the buyer. Typically the business’s seller has no further rights once the assignment takes place. It is common that the landlord will have wording in the contract that states the seller is still responsible for any part that the buyer doesn’t perform as expected.

All Lease Issues Should Be Disclosed at the Beginning of the Sales Process

If there is a problem with your lease, this should be disclosed in the beginning of the sales process. This is a major problem and should be addressed before a business is place for sale. Buyers don’t like unknowns and not having a firm location is definitely an issue that must be resolved.

Buyers want to see that you have made their transition from buyer to owner/operator as easy as possible. Providing clarity of issues, such as leasing, will help you attract a buyer and keep a buyer. Regardless of whether it is dealing with leasing issues or other key issues involved in buying or selling a business, working with a business broker can help you through the process and achieve results.

 

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AUTHOR: Kathy McLaughlin
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