Getting to grips with the process of selling a business and commercial lease

28 May 2021

Selling a fish and chip shop or other takeaway? Looking to retire and offload your hair salon? Moving on from your corner shop business? Calling last orders on the pub you are running? On the face of it all of these businesses are very different, and indeed selling them will involve different considerations, but often they will all have a common factor which needs to be dealt with as part of the sale. They will more often than not involve the sale of a commercial lease as part of the business sale.

Operating a business out of a leased premises is very common and as such most sales involving a “bricks and mortar” business will require dealing with the commercial lease. Understanding the process of selling a business with a lease will allow you to avoid any nasty surprises. This is why we always advocate taking early advice. One of the keys to a smooth transaction is early communication with the relevant parties, most notably the landlord, and as such getting professional advisers in early is crucial.

The Landlord

Once a buyer is in place, the first step would be to notify your landlord that you plan to sell your business. Almost all leases contain provisions which require landlord consent before selling on, or assigning, a lease and in our experience the process of obtaining consent can take some time as the communications filter through the relevant individuals such as managing agents and the landlord’s advisers. The assignment of the lease, and consequently the sale of the business, cannot take place until the landlord gives his or her consent so this is very important. Our approach to this is to make early contact and ensure continued communications with the landlord’s representatives.

Usually the landlord will want to protect his or her position. In order to do this you may be asked for references and credit checks in respect of your buyer. Again speedy communications are key and if this request is made we would usually get the buyer’s solicitor on the case as soon as possible. The landlord may also ask for an increased rent deposit if the buyer is a newly incorporated company or a personal guarantee from a director of the buyer. Furthermore, you as the seller may be required to provide a guarantee for the buyer’s performance of the lease terms.

It is also inevitable that the landlord will require you, as the outgoing tenant, to bear his or her legal costs. Accordingly you will usually be required to provide payment of these costs, albeit we tend to try to negotiate a cap when we deal with these transactions.

If all of the above is in place to the satisfaction of the landlord, the parties will usually enter into a deed of assignment of the lease. This document will serve to transfer the lease from you into the name of the buyer who will then step in as the tenant. A key part of taking early advice will be to take advice from property specialists on the terms of the deed of assignment and the process of assigning the lease generally.

The Buyer

In terms of dealing with the buyer, the first step will likely be due diligence. In a business sale this will tend to be less rigorous than a share sale as the buyer can cherry pick the assets it wants and leave behind the liabilities but there will still be a due diligence exercise.
You will likely be asked for details of trading history and accounts but a great deal of the due diligence will centre on the lease and the premises. A buyer will likely want to know when the lease is due to expire and any renewal options. This is essential as the future buyer will end up taking over the lease and consequent relationship with the landlord.

In addition it is likely that a buyer will want to see details relating to utilities, insurance policies and confirmation that the premises in question have been used correctly in line with planning consents and any licensing restrictions. Other commonly asked questions relate to health and safety and the provision of gas safety certificates and, where relevant, things like asbestos and radon reports. It is therefore important to keep all information relating to the premises in good order if you are looking to sell. We always advise clients to get these matters in order when they speak to us at the early stages of a transaction in order to avoid delays in the latter stages. Ensuring that you prepare properly before you plan to sell, such as tidying up leases (and indeed any other contracts) will significantly reduce your chance of issues being raised at the due diligence stage.

The reality is that due diligence can sometimes be the more time consuming aspect of a business sale, as it requires a degree of scrutiny and it is at this point that any problems will be uncovered. Another reason why the early involvement of experts is important is to ensure these matters are in good order so as to avoid issues arising later.

Assuming the due diligence has been carried out to the buyer’s satisfaction and they are happy to proceed the parties will set about agreeing the terms of the asset purchase agreement. This document sets out the assets being purchased, the price apportioned to each and other commercial terms of the agreement. This may involve arrangements such as deferred consideration and may also include warranties to protect the buyer. Our aim when negotiating on behalf of a seller is to limit these as far as possible in order to minimise the seller’s exposure.

In practice the asset purchase agreement and deed of assignment with the landlord will all be finalised in tandem and completion will take place one all is agreed. Generally on completion day payment would be made and the agreements will be executed. There may also be a requirement to do a stock take if the business involves physical stock. Once all this is done and completion if confirmed the business will be passed to the buyer and you, as seller, will receive the sale proceeds.

Selling a business with a lease can be a complex process but it need not be daunting with the right transaction team and early preparations. Ensuring things are in good order, as described above, will go a long way toward streamlining things and communication and coordination throughout is crucial.
If you are considering selling your business or want more information, please feel free to get in touch with Alvin Ittoo by telephone on 01273 447 075, email on [email protected] or contact us on our enquiry form.

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