The largest percentage of businesses sold lease a building or space in which to operate. Because that can sometimes take longer than expected, it is important to start the process of obtaining a lease immediately after a Letter of Intent or Offer to Purchase is agreed upon by the buyer and seller. Many times, the landlord may live in another city, state or country. It may be possible for the buyer to sublease or get an assignment from the seller; but the seller’s choice is usually for the landlord to write a new lease for the buyer, who is the tenant. A security deposit will be required. The seller will get his/her security deposit returned, and the tenant will provide a security deposit to be held by the landlord without liability for interest and as security for the performance by the tenant of tenant’s covenants and obligations under the lease. It will not be considered an advance payment of rent. Never close without a signed lease, assuming the lease will be completed soon after closing. For most businesses, it would certainly decrease the value if the lease fell through and the buyer had to relocate. If the owner of the business owns the building, it would obviously take a shorter amount of time to get a signed lease.
Your landlord or business broker will write the lease for you, but it is always a good idea to have your attorney review it. There are many items to consider and include in a lease, and this article is to make you aware of some of the important considerations.
When considering the term of the lease, think about the importance of the location to the success of your business. A one-year lease sometimes sounds good to buyers, but a lease for three to five years actually protects you more, along with a renewable extension clause for another three to five years or the length of the original lease. If you are buying a profitable business and have done your due diligence, your likely chance of failure is small, so you want to know you’ll be able to remain in the location where the business has a history of profitability. The amount of rent and the expected increases will be included, as well as a default clause. The rent must be fair and in line with the current market rate. The lease and renewable clause usually require some negotiation.
Another common negotiation is for repairs. It is common for the tenant to make necessary repairs to the leased premises at his/her expense except for major mechanical systems or the roof. Sometimes landlords will offer a lower rent payment for the first year to help the new owner get started. The landlord wants the business to stay in its location, but the written lease protects the tenant from a change of plans of the landlord or the estate. As none of us know what the future holds, it is important to have everything in writing, and yes, even with a close friend.
The lease will state the purpose for the use of the premises and the ability, with landlord’s permission, to remodel, redecorate, and make additions, improvements and replacements of and to all or any part of the leased premises from time to time. These leasehold improvements are considered an added value to the business.
Taxes and insurance will be included in the lease. The landlord should pay all general real estate taxes and installments of special assessments coming due during the lease term, along with personal property taxes on the landlord’s personal property. The tenant will be responsible for his/her personal property taxes at the leased premises. If the seller is pleased with the business insurance agent, it is wise for the buyer to look over the policy and speak with that agent. It’s always good to comparison shop, but this would be a good place to start and possibly start with that agent and insurance and compare later. Included in the lease will be the specifics of what will be covered by the landlord’s insurance and what will be covered by the tenant’s.
The lease will address parking specifications for the tenant, employees and customers. Depending on the location of the business, it may be necessary to pay parking for space in a structured parking area. However, most small businesses will have ample parking next to the business.
This short article does not include everything in a lease. As I mentioned earlier, read the lease presented to you and ask your attorney review it.
