Buying or Selling a Business – the Significance of the Lease

It is rare that a business in New York owns the property from which it operates.  Most businesses rent commercial space for their store/restaurant/warehouse or other venture.  Thus, the owners of the business will be party to a lease with the owner of the building that houses the business.  This lease becomes an important piece in the puzzle that is the process of selling/buying a business in New York.

When it comes to selling or buying a business that has a lease, the lease becomes an important part of the selling/buying process.  The buyer should carefully check the lease terms to not only determine the rent and the remaining term of the lease, but also whether the lease can be assigned.  What does that mean?  If the buyer wants to buy the business, the buyer should be able to step almost entirely into the shoes of the prior business owner, including the right to occupy the business premises.  In order to do that, the buyer has to take over the existing lease for the premises or make sure that the landlord of the premises is willing to give him/her a new lease.  If the buyer plans to take over the existing lease, he/she has to make sure that the current lease allows an assignment of the lease to a buyer of the business or if not, that he/she gets the approval of the landlord to take over the lease.

Leases vary greatly in what they state regarding the assignability of the lease.  Some state “this lease can not be assigned without the express consent of the landlord” or “this lease can not be assigned without the express consent of the landlord, which consent may not be unreasonably withheld.”  Others may spell out specific requirements for a potential new tenant before a landlord even considers an assignment of the lease.  There may be additional security deposit requirements or even fees for the landlord for allowing another tenant to take over the lease.

In most cases it becomes necessary for the buyer to prepare an application and submit it to the landlord.  With the application, the landlord will determine whether the proposed buyer is creditworthy and has the financial resources to carry on the business and pay the rent on the lease.  If the lease does not have the aforementioned clause “which approval may not be unreasonably withheld”, the landlord has wide discretion to turn down the buyer and thereby cancel the deal.  No buyer would want to buy a business without having the approval of the landlord to take over the lease.