There are usually four legal stages of purchasing a business that involves a lease. The purchaser will need to complete each stage to finalise the sale successfully. These stages are:
- contract review;
- contract amendments and negotiation;
- lease documentation review; and
- contract exchange and settlement.
In this article, we set out what is involved in each stage and why it is important to engage a lawyer to assist with all four stages of purchasing a business.
Stage 1: Reviewing the Sale of Business Contract
After you have agreed to the key commercial terms with the vendor (the seller), the vendor’s lawyer will prepare a sale of business contract to send to you or your lawyer. Key commercial terms can include the:
- purchase price;
- proposed completion date; and
- assets and equipment you wish to purchase.
The sale of business contract may be in the form of a standard contract of sale, such as the ones prepared by the New South Wales (NSW) Law Society or the Law Institute of Victoria. However, the contract could also be tailored and specific to the sale. The type of contract will depend on the business itself and the terms of the sale.
Once you receive the draft contract, it is important to have it reviewed by a lawyer, so you understand your rights and obligations before signing the contract. Most contracts prepared by a vendor’s lawyer will be drafted with clauses that favour the vendor, including favourable warranties and limits of liabilities.
As the purchaser, your lawyer’s review will involve analysing:
- the key terms of the contract, such as the purchase price, when the deposit is due, when and where settlement will take place (and comparing these with the commercial terms you agreed upon with the vendor);
- any unusual or onerous terms, such as limited restraint of trade clauses and warranties; and
- your obligations upon signing the contract.
It is important at this point to think about the issues your lawyer identifies and how you would like to address them. Your lawyer will be able to assist you with any amendments to ensure you have a more purchaser-friendly contact before you sign on the dotted line.
Stage 2: Amending the Sale of Business Contract
The second stage in the process is amending any terms of the contract. Generally, your lawyer will either prepare a list of amendments or mark-up the contract with the requested changes and send it to the vendor’s lawyer. Then, it is a matter of negotiating the amendments until both sides are satisfied with the terms of the contract.
Each time a party amends the contract, it is important to have your lawyer review those amendments so that you understand the changes in the contract. Some changes may impact your obligations to complete settlement, or your rights and liabilities after the sale is complete.
Stage 3: Lease Documentation
When buying a business that involves a lease, there are two options for taking over the business lease on the settlement date. These options are:
- transferring the lease: or
- entering into a new lease.
This will normally be agreed upon before the vendor’s lawyer prepares the sale of business contract. This way, the contract can set out the settlement obligations to either transfer or surrender the current lease.
Transferring the Lease
Transferring the lease involves the vendor assigning their rights under the lease to you, the purchaser. This is done through a deed of consent and assignment of lease (deed of assignment). The deed is a legal document that allows for the transfer of the lease from the vendor to you. Both the deed of assignment and the current lease will be the legal documents your lawyer will need to review. This review will allow you to understand your lease obligations after you take over the business.
However, before the vendor can transfer the lease, you will need to obtain consent from the landlord. This allows the landlord to assess your suitability to run the business and continue paying rent under the lease. To assess your suitability as a tenant (and therefore decide whether they will consent to the transfer), the landlord will usually request to see your:
- financial information;
- business history;
- CV; and
- professional references.
Once the landlord has provided their consent, they will have their lawyer prepare the deed of assignment for your lawyer to review.
Entering into a New Lease
Before you enter into a new lease with the landlord, the vendor will need to terminate or surrender the old lease. This can be achieved via a deed of surrender of lease. This is a deed that ends the lease between the landlord and the vendor. Once the landlord and the vendor enter into the deed of surrender of lease, the existing lease is terminated. The landlord can then enter into a new agreement with you.
Generally, the date of surrender of the existing lease is the same as the commencement date of your new lease (i.e. the date of settlement of the sale of business). If you agree to enter into a new lease with the landlord, your lawyer will review the deed of surrender of lease to confirm the lease has been effectively terminated. They will then review the new lease agreement, so you understand your rights and obligations after you occupy the premises.
It is common for the landlord’s lawyer to prepare the required lease documents and provide them to both your lawyer and the vendor’s lawyer for review. It is important to have the lease documents reviewed and, if required, amended. This review will make sure you are not taking on any additional obligations from the previous tenant.
Stage 4: Contract Exchange and Settlement
The final stage involves exchanging the sale of business contract and completing the conditions of settlement set out in the contract. This process can be quite complex. Therefore, it is important you undertake the process correctly and in accordance with the contract.
If you are unfamiliar with the settlement process, your lawyer can assist you to exchange the contracts and fulfil your settlement obligations. This will ensure you successfully purchase the business without any delays or penalties.
After you have finalised the contract amendments in Stage 2, it is time to sign and exchange the sale of business contract. Exchange usually involves:
- you signing a copy of the contract and sending it to the vendor’s lawyer; and
- the vendor signing a copy of the contract and sending it to your lawyer.
Exchange usually takes place via email, with the original signed documents sent to each party in the post. There may also be a requirement in your contract to pay a deposit to the vendor or broker.
Settlement involves finalising the obligations set out in the sale of business contract before, or on, the settlement date. Your lawyer will be able to identify, and assist you to comply with, all of your obligations. Generally, there is a delay between exchanging contracts and the settlement date. The reason for this delay is to allow for:
- the vendor to carry out a stocktake of inventory;
- the vendor to organise the transfer of assets, such as supply contracts and business name;
- you to prepare your finance for the outstanding payment amount;
- the vendor to prepare requisitions (NSW only) to address any outstanding queries about the business; and
- both parties to make adjustments of outgoings on the rent and employee entitlements.
There are four key stages of purchasing a business. The overall process is complex and involves more than simply reviewing and signing the sale of business contract. Therefore, understanding and methodically addressing each stage will ensure the sale goes through smoothly and on time.
If you require assistance with purchasing a business, contact LegalVision’s business purchase lawyers on 1300 544 755 or fill out the form on this page.
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