Three Lease Issues That Can Kill a Business Deal

When my client decided to sell her business, she thought most of the issues would revolve around agreeing on the ultimate purchase price, and minimizing any claims the Buyer could make against her after the sale.  However, it turned out, lease issues posed the biggest problems.

  1. The first lease issue we encountered was getting the landlord’s permission to allow us to assign the lease to the buyer.  Under the lease, the landlord had no obligation to allow us to do this.  So, we had to get the landlord’s consent, and of course he was not going to give this without getting something in return (read: money).  We reviewed other business and legal strategies to avoid paying off the landlord.  For instance, we could have threatened to sell the business, have the buyer move to a new location, liquidate the company, and then just walk away from the lease.  But, a corporation can’t avoid paying a creditor by simply liquidating its assets and distributing excess money to the shareholders (a topic for another post).  Ultimately, we had to payoff the landlord, but we were successful in getting the buyer to contribute a portion of this payment because she wanted to stay in the same location.
  2. The second issue to resolve was the CAM (common area maintenance) adjustment.  The CAM provision required my client to help pay for improvements and repairs made by landlord in the prior year.  While normally not a big issue, the landlord had spent a lot of money in the prior year.  In fact, the CAM adjustment was so large it could have killed the deal if we had to pay it alone.  By developing a four-pronged negotiation strategy with the buyer, we were able to convince them to absorb some of this CAM adjustment.  This could have been avoided had the initial CAM adjustment provision been more effectively negotiated at the outset of the lease. 
  3. The third and final impediment was the landlord’s demand the seller still be liable for another year of the lease after the sale, in case the buyer failed to pay rent.  Essentially, the landlord wanted us to act as the buyer’s guarantor for one year.  This was a very big problem because my client wanted to sell the business and not have to worry about further obligations.  If there were further debts, it might change the purchase price, or she might find a different seller who was possibly more credit-worthy.  Fortunately, I was able to develop a legal strategy to significantly minimize my client’s risk of having to pay even if the seller failed to pay rent.  Again, this issue could have been avoided had there been a comprehensive review of the lease at the time it was signed.

All too often, tenants are only worried about what they have to pay during their lease.  They don’t worry about what they have to do if they want to get out of the lease before it ends. However, these terms are critical for all businesses, especially small businesses, those in the retail industry, and those that are rapidly expanding. 

However, these terms are critical for all businesses, especially small businesses, those in the retail industry, and those that are rapidly expanding. 

While most of this could have been avoided with more upfront planning, we were ultimately able to resolve these issues; however, it took additional time and legal expense, as well as financial cost to bring the sale of the business to close.

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