When purchasing a business or franchise, in most instances, one of the primary assets that you will be acquiring is the “lease” to the existing business location / store that you are “buying”. A few of the many obvious reasons as to why your lease agreement will be crucial, include:
- Profitability – The monthly rent and “additional rent” will directly impact your profits;
- Permitted Use of the Business Premises – The lease “use clause” will restrict the the products / services that you will be permitted to sell / offer – including your ability to expand your products / services in the future. For example, if you are leasing a gas stations, does your lease permit you to add a car wash or convenience store in the future? If you operate a soup franchise does your lease permit the addition of ice cream or similar products that a franchisor may require for product diversification?
- Assignability – The lease agreement will specify and determine your future right to sell your business and assign your lease to a third party purchaser.
Recognizing the obvious importance of the “lease assignment”, as a purchaser, at the outset of your proposed purchase transaction, it is critical that you communicate with the landlord and obtain the landlord’s written consent to your purchase transaction and the expected operations of your business. The landlord’s consent must be identified as an express contingency specified in your purchase agreement and, among other things:
- be in writing;
- be signed by the landlord;
- acknowledge the landlord’s approval of the assignment;
- expressly acknowledge that the lease is in “full force and effect” with no outstanding defaults by the seller; and
- acknowledge the amount of the tenant’s security deposit.