When it comes to buying or selling a business, leases play a critical role, especially for businesses operating from leased premises. Let’s delve into why leases matter and explore key considerations:
- Lease Basics:
- A lease grants a tenant the right to use a property in exchange for rent payments.
- Just like residential leases, commercial leases protect tenants’ rights and outline their responsibilities.
- In Australia, where private property rights are well-protected, business leases are essential.
- Goodwill and Lease Value:
- Goodwill in business sales often hinges on lease rights.
- In regions with limited business options (e.g., only one liquor store or newsagent in a small suburb), the lease’s location value is significant.
- The scarcity of business opportunities amplifies the importance of securing a favorable lease.
- Key Lease Considerations:
- Lease Start Date and Term: Understand the lease commencement date, duration, and any renewal rights.
- Business Restrictions: Check if there are limitations on the type of business allowed or operating hours.
- Rent Increases: Know how rent escalations work (fixed percentage or tied to CPI).
- Lease Incentives: Consider rent-free periods or renovation allowances.
- Relocation Clauses: Understand any provisions related to relocation or moving.
- Security Deposit: Determine the required deposit and whether personal guarantees are necessary.
- Examples:
- Smart Supermarket Lease: A supermarket with a reasonable lease term, two ten-year renewal options, and CPI-based rent adjustments demonstrates savvy tenant planning.
- Cautious Retailer with Fit-Out Subsidy: Some businesses receive fit-out subsidies from shopping centers. However, if the lease requires repayment upon sale, it can create challenges during resale or business transfer.
- Landlord Requirements: Commercial landlords may demand higher security deposits. Franchise businesses often benefit from leasing arrangements negotiated by the franchisor.
- Assigning vs. Surrendering Leases:
- Assigning: The vendor transfers lease rights and obligations to the purchaser through a deed of assignment. The new tenant steps into the vendor’s shoes.
- Surrendering: The vendor terminates the existing lease, allowing the purchaser to negotiate a new lease directly with the landlord.
- Factors to Consider:
- Landlord preference (assignment or surrender).
- Lease terms (remaining duration).
- Legal requirements (e.g., disclosure statements for retail leases).
- Roles of Parties:
- Landlords:
- Consider whether to sign a new lease or extend the existing one.
- Must not unreasonably withhold consent for lease assignment.
- Sellers:
- Plan lease-related matters early.
- Longer leases enhance sale prospects.
- Negotiate lease terms if the remaining term is short.
- Buyers:
- Understand lease conditions (seek legal advice if necessary).
- Decide whether to assume the existing lease or negotiate a new one.
- Leverage current market conditions for favorable lease terms.
- Landlords:
- Beyond Rent: Negotiate beyond rent—consider rent-free periods, fit-out subsidies, and other critical clauses.
Remember, a well-handled lease can significantly impact the success of a business sale. Seek professional advice and approach lease negotiations strategically.
