Don’t Let the Lease Be Your Anchor in a Smooth Sailing Deal
Commercial Lease: Preliminary Determinants
With many business closings, a lease is involved. Looking back at the hundreds of transactions I have closed over the past 25+ years, I could easily write a book about the trials and tribulations of “Leases Gone Bad” in sales. It is important to review the Seller’s Lease early in the process and start negotiating with the Landlord. Some aspects to consider:
- Each Parties Capacity to Consent: Can all parties enter into a lease legally and voluntarily?
- Lease Conditions: What are the overall terms and conditions? Is there a deadline for satisfaction of condition? If there is a satisfaction of condition, what steps should be taken? Do you need to deliver a written notice of the other party? What is the effect of failure for the condition; automatic cancellation, cancellation with written notice, or waiver?
- Lease Terms: Are the terms fixed or month-to-month? What is the length of the term? Can the tenant extend the term? Are there terms for termination other than tenant’s default?
- Security Deposit: Will the tenant be required to post a security deposit and what is the amount?
- Rent: What is the fixed/minimum rent amount, commencement and payment intervals? What percentage will the tenant be required to pay? Will the payments increase over the term of the lease? Will the tenant be required to pay property taxes, insurance, or other operating expenses in addition to the rent?
- Using the Premises: Will the tenant be limited to the type of business or be able to change over the term of the lease? What restrictions and prohibitions are involved? What are the CC&Rs, rules and regulations the tenant will be required to abide by over the term of the lease? Are signs allowed?
- New Building Construction: What are the conditions applied towards a new building or construction? Can the tenant make improvements or alterations to the existing space?
- Risks, Responsibilities and Expenses: Who will be responsible and obligated to pay incurred expenses, insurance, repairs, maintenance, utilities, and upgrades, such as compliance with American’s with Disabilities Act, etc.
- Subletting: Is the tenant allowed to sublet over the term of the lease?
- Landlord’s Lender: Are there any terms or conditions, which must be met by the Landlord’s Lender, which could hold up a transaction?
What Could Rock the Boat?
Many Landlords will have specific requirements, which can throw the timing off on finalizing the lease. After obtaining signatures on the Purchase and Sale Agreement, check with the Landlord to see if:
- Documents need to be signed in triplicate;
- Credit checks are required;
- Personal guarantees are required from the Seller;
- Board or management committee approval required;
- Is a fee required to transfer the Lease? If so, how much is it? Determine who pays for it;
- A Demolition Clause in the Lease; &
- Who will prepare the Documents? The Property Manager? The Landlord’s attorney?
For most Landlords, there is little to no incentive for them to expedite this process. For many, this important step for you is a nuisance for them.
My Suggestion: Start early with the Landlord and expect the unexpected!