Buying a business is a major commitment, in terms of the cost, time and effort involved. The premises the business operates from is a crucial part of the business, so it is important to get this aspect of your purchase right.
Step 1 – Confirm there is an existing lease in place
Firstly, you should make sure that there is an existing lease in place. If the lease is being assigned on completion, this should be included as for a condition precedent to the sale of business. If the lease is being assigned on completion it should be included as an annexure to the contract so that you are able to review it prior to signing and exchanging the contract.
As well as confirming the lease is valid, you also want to confirm whether it is registered. In New South Wales, for leases over 3 years (including any option terms) the lease needs to be registered in order for you to have a legal estate in the property. Therefore, you will have more security if you are taking over a registered lease.
Step 2 – Review the terms of the lease
Once you have confirmed that there is a valid lease in place, the terms of the lease need to be reviewed and considered.
Some key terms to consider are:
- Rent & Outgoings – it is important to know how much you are going to have to pay each month, so you can factor this in to considering whether the business purchase is a good investment
- Term of the lease, including option terms & whether there is a demolition clause – you don't want to put all the time and effort into purchasing the business only to find out you will be required to vacate the premises soon after taking over
- Make good provisions – as you will likely be inheriting any improvements made by the existing tenant (seller of the business), you want to confirm your obligations at the end of the lease.
Step 3 – Ensure there is a valid assignment of the lease
Assigning a lease means you become the new tenant under the lease and are liable for the obligations under the lease. Unless a variation of the lease is agreed, your lease will be on the same terms as the existing tenant's lease.
While each lease will set out different requirements and processes for the assignment of the lease, generally the landlord's consent will be required. Before they consent, it is likely the landlord will request financial information from you, and evidence that you will continue the business in the same way. This is common as the landlord will try and receive some assurance that you are going to continue the business successfully and are not going to default under the lease. Once the landlord's consent is obtained, the parties usually enter into a deed of assignment of lease governing the terms of the assignment. It is important to seek legal advice on the deed of assignment of lease before signing to ensure your interests are protected.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.