Buying an existing business- lease issues

To follow up on my earlier post on buying a business, it is always essential to look at the details of the lease you will be acquiring as part of the business (if the business is on leased premises).

Will the landlord consent to you assuming the lease? For some businesses, the value of the business includes a favourable lease in a good location. If you are purchasing a business on leased premises, you will need to obtain the consent of the landlord prior to assuming the existing lease. This is usually included as a condition of the Agreement. The type of information that a landlord will want before agreeing to an assignment of a lease will vary but, at a minimum, they will want credit information and information about your experience running a business.

What should you look for in a lease? The complexity of a lease will vary depending upon whether your business is located in a major shopping centre or a small commercial building. In reviewing a lease, pay attention to how many years are left on the lease prior to renewal, and whether there is a right of renewal. Ideally, what you want is a right to extend the lease, as opposed to an option to renew. An option to renew is only a right to negotiate a new lease, with new terms and provisions. It is more favourable to have a commitment that the lease can be extended upon the same terms and conditions as contained in the original lease.

If the end of the term is coming up on the existing lease, it might be better to negotiate a new lease altogether.

Most leases are ‘net’ leases meaning that in addition to rent per square footage, you also pay to the landlord additional rent such as property taxes, and operating costs such as utilities, insurance, maintenance, repair & property management. You need to know the amount of these additional costs since you will be paying for them. Quantifying the additional rent will help you decide whether the lease is affordable based upon the type of business you will be operating at that location.