When selling a business, such as a restaurant, takeaway, hair salon or retail shop, the seller may also need to transfer their existing commercial lease to the buyer. This is known as an assignment of lease.
However, selling a business does not automatically mean that the buyer can take over the premises. Most commercial leases contain restrictions on assignment, which means that the tenant may need to obtain the landlord’s consent before transferring the lease to the buyer.
This is an important part of the transaction, as failure to obtain the necessary consent could delay the sale or result in a breach of the lease.
Written by Emily Ding, Trainee Solicitor
Why Do You Need Landlord’s Consent?
Most commercial leases require the tenant to obtain the landlord’s written consent before assigning the lease. This is usually dealt with by a legal document known as a Licence to Assign.
The landlord will want to make sure that the incoming tenant is suitable and financially capable of taking over the lease obligations.
The landlord may therefore request certain documents from the buyer, such as bank statements, accountant’s references, previous landlord’s references or business information.
Under the Landlord and Tenant Act 1988, where applicable, the landlord must deal with a written application for consent within a reasonable time and must not unreasonably withhold consent.
However, the landlord may have reasonable grounds to refuse consent, for example, where there are genuine concerns about the buyer’s financial ability to pay the rent.
Will The Seller Still Be Liable After Selling the Business?
This is something that many business owners may overlook.
In some cases, the landlord may require the outgoing tenant to enter into an Authorised Guarantee Agreement (AGA) as a condition of granting consent.
This means that even after selling the business, the outgoing tenant may remain liable if the incoming tenant fails to comply with the lease obligations, such as paying rent.
The outgoing tenant should therefore carefully consider the terms of the AGA before agreeing to it.
What Should Sellers Consider?
Obtaining landlord’s consent can take time, particularly where financial references, a rent deposit or an AGA are required.
It is therefore advisable to review the lease and apply for consent as early as possible. The business sale and lease assignment should also be properly coordinated to ensure that the buyer has the legal right to occupy the premises upon completion.
Conclusion
Selling a business does not automatically give the buyer the right to take over the existing commercial lease. Landlord’s consent may be required, and additional conditions may apply.
Seeking legal advice at an early stage can help both parties understand their obligations and avoid unnecessary delays to the transaction.
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