Negotiating Lease Assignment Clauses for the Sale of a Business

An often overlooked and under-negotiated clause in any commercial lease is the lease assignment clause.  No matter how long your lease is, and how long you plan to maintain ownership of the business, you need to negotiate a good lease assignment clause for proper exit strategy planning.

What are some common things to consider in a lease assignment clause?

Lease Assignment Fee

Landlords will usually write into leases a fee for their time and consideration of your request for a lease assignment.  Ideally, there would be no charge for a landlord to consider the application for an assignment of the lease to your buyer.  However, a large property management company or corporate property owner is more likely to charge some type of fee, as there are administrative costs involved in processing the application.  Amounts that we have seen written into leases for lease assignment consideration if $500-$1,000.  Be on the lookout for what you consider an unreasonably high assignment fee.  We have seen leases with wording that indicates that some arbitrary percentage (up to 50% or more) of the purchase price would be due to the landlord upon consummation of the transaction.  This is something that is very common in Shopping Mall leases.  Though, either way, you want to negotiate this percentage fee down.

Landlord’s Conditions for Consent to the Assignment

It is important to make sure the landlord will not unreasonably withhold consent to the assignment of the lease.  In the assignment clauses of most leases, the Landlord will spell out the criteria that they are looking for in order to qualify a lease assignee (Your Buyer).  Of course, the landlord will have expectations that the proposed assignee will be equally creditworthy as you are and also just as qualified experience wise to run your business.

Notification Time Frame for a Proposed Lease Assignment

Be aware of notification dates for proposed lease assignment.  Often times, there are specified time frames in which the landlord has to be notified in advance of the actual date the assignment  is needed.  Usually, this is a 30 to 60 day time frame.  Thus, if you are trying to close an escrow on time, make sure to notify the landlord  with plenty of time to spare.  Negotiating this time frame to be a shorter window is always helpful, as selling a business is usually a very complicated process to begin with.

Personal Guaranty After Assignment of the Lease

Remaining as a Personal Guarantor to the lease after the assignment is granted.  This is a tricky part of the lease to negotiate.  In most cases, when you sell the business and assign the lease to your buyer, you are likely to be kept on the lease as a Guarantor.  What this means is if your buyer defaults on payments to the landlord, be prepared to get a call and written notice from the landlord that there is a balance due and that you are liable to pay them.  The good news  is that the guaranty usually only lasts for the remainder of the current term and not any option terms, but you need to double check this information.  Best time to negotiate yourself off Personal Guaranty liability upon assignment is when you are negotiating the lease to begin with and not when you are applying for a lease assignment.

Assignment of Lease Option Terms

You need to check on the status of the Option Terms of the lease, whether or not they are personal to you and not assignable to the your buyer.  If the option terms are not being assigned to your buyer, then you need ensure that the buyer is aware of this, and allow them the ability to negotiate their own option terms should they choose to want them.  One benefit of having the buyer negotiate new options personal to the buyer, is that you will be freed of Personally Guaranteeing the option terms, unless you need to help the buyer get an assignment and the options.

For more information and assistance with negotiating your leases, contact our Client Care Manager, Sonia Chhabra by telephone (888) 926-9193 or email cs@justelementary.com