When selling a business with a lease, it’s important to ensure the purchaser has control over the premises after settlement. This can be achieved in two ways:
- have the seller assign the lease to the purchaser at settlement; or
- the seller can surrender (i.e. give up) their lease and the purchaser can enter into a new lease with the lessor.
The decision for the seller to assign or surrender the lease can depend on:
- the time left on the lease term;
- whether the new purchaser wants to accept the terms of the current lease; and
- the lessor’s willingness to enter into a new lease instead of assigning the existing lease.
The seller should address how the lease will be handled when negotiating the terms of the sale of business agreement with the purchaser.
Assignment of the Lease to the Purchaser
Assigning the lease involves the seller transferring their rights under the lease to the purchaser through a deed of consent to and assignment of lease (Deed of Assignment). The deed is a legal document that places the new tenant in the shoes of the former tenant for the remaining term of the lease. The new tenant must comply with all of the lease obligations as if they were the original tenant.
Confirmation and Consent
You will need to confirm whether your current lease contains a clause allowing you to assign the lease and whether you need the lessor’s consent. The lessor cannot prevent the assignment if the purchaser can pay the rent under the lease. If you don’t obtain the lessor’s consent, you may be in breach of the lease and sale of business agreement.
The lessor will usually request the following from the purchaser to assess their suitability as a tenant and provide consent to the assignment:
- financial information such as bank statements;
- business history or CV; and
- professional references.
The lessor will then have their lawyer prepare the Deed of Assignment.
Assigning the Lease
Assigning the lease involves the seller, purchaser, lessor and lawyers acting for each party. During the assignment, the seller is the existing lessee (assignor). The purchaser is the new lessee (assignee).
The assignee, assignor and the lessor will enter into the Deed of Assignment. The assignee is then placed into the same position as the assignor was under the lease. Parties usually sign three copies of the Deed of Assignment, and each party retains a copy for their records.
Depending on which state the premises is located, the assignor may also need a transfer of lease form to register the assignment with the land titles authority of your state. Generally, the assignor and assignee must sign the form, send it to the lessor who then sends it to the land titles office for registration.
In most states and territories, the assignor must provide a disclosure statement to the assignee and the lessor if it is a retail lease. In NSW, the assignor’s disclosure statement includes any details that the assignee needs to know such as:
- changes to the lease since it was first entered into (e.g. any security, such as loans, or rental incentives the landlord has provided to the tenant); and
- the business’ sales figures for the period the lease has been in operation.
In NSW, the assignor will need to provide the disclosure statement to the assignee and the lessor within seven days before the assignment of the lease. This notice will release them from any liability that arises under the lease after settlement.
There are different requirements and consequences regarding the assignor’s disclosure statement in each state and territory, so it’s important to be aware of the requirements in your state.
Surrendering the Lease
The seller may also decide to surrender or ‘give up’ the lease via a deed of surrender of lease. Once parties enter into the deed, the existing lease agreement ends, and the lessor can enter into a new lease agreement with the purchaser. Typically, the date of surrender of the existing lease is the same as the commencement date of the purchaser’s new lease.
Unlike a Deed of Assignment, the lessor does not have to agree to ‘surrender’ the current lease and enter into a new lease with the purchaser. The seller should also confirm whether the lease includes a surrender clause.
If you surrender the lease as a seller, you will be required to pay any costs relating to terminating the lease, including any outstanding rent, unless you and the lessor reach an agreement. Before surrendering your lease, it is a sensible idea to talk to your lessor about what you will be responsible for when surrendering the lease.
If your lease is registered with the land titles office in your state, you may also need to sign a Surrender of Lease form with the lessor.
When selling a business, it’s important that you understand your rights and obligations for assigning or terminating the lease. As a seller, ensure that you correctly assign or terminate your lease so that your business is no longer liable for any issues that arise after you sell your business.
If you have any questions or need assistance selling your business, get in touch with LegalVision’s specialist sale of business lawyers on 1300 544 755.
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