Question re tenant selling leasehold

Hi, If the tenant in a commercial property decides to sell the Leasehold (the business), how does this affect the Freehold commercial property owner. I cannot find any reference to this in the lease itself. Does the prospective new tenant just take over the lease? Or is a completely new one drawn up? The lease is a 10 year lease, with 9 years left on it.

Thanks, Lou
 
Lou, what you are referring to is the assignment of lease.

The clause covering sale of the business will vary between leases but generally consent cannot be unreasonably withheld. The tenant is responsible for the lessor costs (legal, accounting and property advice) as well as for the preparation of the assignment document, provision of new security, copies of financial documents of the assignee etc.
 
Scott has hit the nail on the head above.

First thing to do is review the assignment provisions of the lease. The lessee should ensure they comply with these provisions. It would be usual to require the lessor's consent and to enter into a deed of covenant where the incoming lessee agrees to be bound by the lease.

It will depend on the terms of the lease and deed of covenant whether the outgoing lessee is still liable under the lease or if their obligations cease upon assignment.
 
As I understand it, you can also hold the original lessee liable in the event that the sub-lessee fails to pay the rent.

You need good legal advice paid for by the original tenant.
 
As I understand it, you can also hold the original lessee liable in the event that the sub-lessee fails to pay the rent.

You need good legal advice paid for by the original tenant.

This will depend on the terms of the lease and the deed of covenant.
 
The aim for the outgoing tenant is to remove themselves completely from the lease.

However, in an instance where the landlord is able to prove the incoming tenant is not of the same quality as the outgoing, they are able to keep the outgoing tenant either as"

- the tenant with the new tenant as the sub Lessee

- removed as a tenant but tied to the lease as a guarantor
 
The aim for the outgoing tenant is to remove themselves completely from the lease.

However, in an instance where the landlord is able to prove the incoming tenant is not of the same quality as the outgoing, they are able to keep the outgoing tenant either as"

- the tenant with the new tenant as the sub Lessee

- removed as a tenant but tied to the lease as a guarantor

This is wholly dependent upon the terms of the assignment provisions and the changes in beneficial ownership of any company. Not all leases are the same, not all assignments are the same
 
So long as the landlord agrees all leases may be altered or cancelled,

That's a deed of variation. An assignment pertains to the change of tenant whether by sale of shares of the tenant or complete transferof the lease to another party.

The lessor and lessee may negotiate a termination of the lease upon agreement (usually with a payout by one party or the other).
 
There are some onerous leases around so definitely get expert advice on this situation. My friends got caught with one and as lessees when they sold the leasehold to another lessee, lease provisions held the seller over as guarantor for the new lessee(yes as guarantor for strangers) until the end of the current 5 year period ( e.g. 5x5x5x5 lease). :eek:
Some leases won't allow the buyer to mortgage the lease so must be purchased for cash. Some bind the tenant to use specific tradies for maintenance or repairs. Watch the rent increase formula and work it out on a spreadsheet for the next 5-10 years etc.
Any lease can be changed by mutual agreement between the 2 parties.
But the lease is king and can be mean.
Good luck
Cheers
crest133
 
Wonder if the stranger guarantor type clause would hold up in court ? Not sure if there's a clear definition of "harsh and unconscionable" but surely that clause would come close.
 
Wonder if the stranger guarantor type clause would hold up in court ? Not sure if there's a clear definition of "harsh and unconscionable" but surely that clause would come close.

That one is typically in the lease. Getting the vendor to continue to cover the lease if the person that they put in place fails is the risk that they should bear otherwise they could sell to someone with no track record, less financial backing or no business skills. It is neither harsh nor unconscionable as the lessor's position should not be diminished or put at risk due to the tenant's action.
On one lease in another state, the lessee could not assign to a party of lesser standing - that meant another publicly listed company. :eek:
 
Wonder if the stranger guarantor type clause would hold up in court ? Not sure if there's a clear definition of "harsh and unconscionable" but surely that clause would come close.

That one is typically in the lease. Getting the vendor to continue to cover the lease if the person that they put in place fails is the risk that they should bear otherwise they could sell to someone with no track record, less financial backing or no business skills. It is neither harsh nor unconscionable as the lessor's position should not be diminished or put at risk due to the tenant's action.
On one lease in another state, the lessee could not assign to a party of lesser standing - that meant another publicly listed company. :eek:
 
Very good points Scott. The terms of the lease should state whether that's the case and under what circumstances the landlord should agree to an assignment of the lease. The outbound lessee should not be liable for the future performance of the new lessee.
Cheers
crest133
 
The outbound lessee should not be liable for the future performance of the new lessee.
crest133

I'll disagree on that point Tony. The lessor should not let the original tenant off the hook until the assignee has proved themselves for the balance of the lease. Alot can happen in 3-5 years (or in this case 10 years). You would have to be asking why did the lessee take on the premises with a 10 year lease if they were going to sell within a year? Is it the case of a franchisor took on the 10 years, proved the site works as a company owned store, found a franchisee and wants to assign? Hold the franchisor to the terms of the lease.

Is the current lessee a business whiz, built up the business (or riding the crest of the xyz craze) and found a buyer willing to stump up the $$ (but will be short every month because of the amount they have borrowed to buy the business).

Is the business based on goodwill of the tenant? Will it evaporate when they leave and the lessor is left with a tenant with no turnover?

One of the other posters on the forum has just assigned a lease (they'd know all of the dramas from the assignor's aspect).
 
I asked the owner to transfer the lease and he said "you know what you are doing, I don't know if the new people do"

Last business I sold I had to guarantee the lease payments until the next option was exercised. My solicitor is a Real Estate specialist and he said "no way out" if the other guys solicitor is on the ball.

He has got it through occassionally but only when the other side is not on the ball or the owner allows it to happen.
 
I can see your point of view Scott. However, where this might not suit you is if you sold a tenanted investment commercial property where you're the landlord and the new purchasing lessor wants to hold you over as guarantor until the end of the current 5 year lease in case the investment doesn't perform as well as you said.
Another example is where John the hairdresser trading as Snips rents the premises from you and sells the business to Peter who is a complete stranger to all parties. Normal everyday sale of a business. After John sells the business, he is most certainly not going to be willing to be guarantor for Peter. Also after John sells and collects his money at settlement, if he has to be guarantor for some stranger called Peter, then John's bank will downgrade John's borrowing capacity by the amount of his "liability" because he's a guarantor for someone.
Under the terms of most leases, depending on who writes them, assignment of the lease usually requires the approval of the landlord who cannot reasonably refuse. Usually the assignment clauses say the buyer must be of good character and have the financial standing and business skills to operate the business and pay the rent. It usually becomes the landlord's sole risk not shared with an outbound tenant.
So I'd have to say in my experience I think this kind of onerous holding over "guarantor for strangers" clause is uncommon and should be contestable, but I'm not a lawyer.
Cheers
crest133
 
Wonder if the stranger guarantor type clause would hold up in court ? Not sure if there's a clear definition of "harsh and unconscionable" but surely that clause would come close.

Yes it does. Just claimed on one last month. You need to issue the guarantor the same legal notifications as the tenant.
 
So I'd have to say in my experience I think this kind of onerous holding over "guarantor for strangers" clause is uncommon and should be contestable, but I'm not a lawyer.
Cheers
crest133
Well it's in my warehouses lease. No way would I let my tenant offload the lease to a $2 company and walk away scott free.

We had it happen that 4 months into a 2 year lease tenant suddenly decided to let someone else take over his business and premises. He was on the line until the end of the lease.

Cheers
 
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