Your Commercial Lease When Selling a Small Business: What to Check
For many small businesses, the location is part of what a buyer is paying for. That makes your commercial lease one of the most important documents in a sale. Here's what to check, ideally before you list.
Why the lease matters to a buyer
A café, salon, gym or shop often depends on its location and the customers it already brings in. If the buyer can't keep the space on reasonable terms, the business may be worth much less to them, and their lender may not finance the purchase.
Buyers and lenders usually look at how many years are left on the lease, whether there are renewal options, what the rent is and how it changes, and whether the landlord will agree to the new owner.
Assignment, sublease or a new lease
- Assignment: the buyer takes over your existing lease for the rest of its term. This is the most common route in an asset sale and almost always needs the landlord's written consent.
- Sublease: you stay the tenant and rent the space to the buyer. It's less common in a sale because you stay tied to the space and the buyer has less security.
- New lease: the buyer signs a fresh lease directly with the landlord. This can give the buyer a longer term, but the rent and conditions may change.
In a share sale, the company that holds the lease doesn't change, but the people who control it do. Many leases treat that as an assignment too. Our guide to asset sales and share sales explains the difference.
What to look for in your lease
- The assignment clause. Does the landlord have to consent? Can consent be unreasonably withheld? Are there conditions, such as financial tests for the new tenant?
- A recapture or termination right. Some leases let the landlord take the space back instead of approving an assignment. It's important to know this before a buyer is involved.
- Change of control. Whether selling the shares of your company counts as an assignment.
- Term and renewal options. How long is left, and whether renewal options pass to a new tenant or are personal to you.
- Personal guarantees and indemnities. Whether you or anyone else personally guaranteed the lease, and whether that guarantee continues after an assignment.
- Use clause. Whether the buyer's plans fit the permitted use of the space.
- Fees, deposits and restoration. Any fee for processing consent, how the security deposit is handled, and any duty to restore the space at the end of the lease.
- Rent and arrears. Make sure rent and any common area costs are up to date. Amounts paid in advance are often sorted out as closing day adjustments.
Getting the landlord on side
- Read the lease with your lawyer before you list, so you know what consent requires and how long it might take.
- Think about when to tell the landlord. Some sellers mention their plans early to a landlord they get along with; others wait until they have a serious buyer under a letter of intent. Your lawyer can help you decide.
- Help the buyer put together a clear, complete application. Missing information is a common cause of delay.
- Allow time. Landlord consent can take weeks, especially with larger property managers, so build it into the timeline in your letter of intent.
- Ask whether you can be released from the lease and any personal guarantee once the buyer takes over. Landlords don't always agree, but it's worth asking.
A note on advice
This guide is general information, not legal advice. Commercial leases vary widely, and provincial law, such as the Commercial Tenancy Act in British Columbia, applies alongside what your lease says. Please have your own lawyer review your lease and any assignment documents.
For the wider plan, see what documents you need to sell a business, due diligence when selling and how to prepare your business for sale.
Common questions
Do I need my landlord's permission to sell my business?
You don't need permission to sell the business itself, but most commercial leases say you can't assign the lease to someone else without the landlord's written consent. If the buyer needs to stay in your location, the landlord's consent usually becomes a condition of the deal.
Can my landlord refuse to let me assign the lease?
It depends on the wording of your lease and the law in your province. Many leases say consent can't be unreasonably withheld, but some give the landlord more room, and some let the landlord end the lease instead. Have your lawyer read the clause before you list.
What will the landlord want to see from the buyer?
Commonly a completed application, the buyer's business plan or experience, financial statements or a credit check, and sometimes a personal guarantee or extra deposit. Landlords may also charge a fee for reviewing the request and preparing the paperwork.
Am I still responsible for the lease after I sell?
Often, yes. Unless the landlord signs a release, many leases keep the original tenant, and anyone who gave a personal guarantee, responsible if the new owner doesn't pay. Ask your lawyer whether a release can be negotiated as part of the assignment.
Does a share sale avoid the need for landlord consent?
Not always. In a share sale the tenant company stays the same, but many leases treat a change in who controls the company as an assignment that still needs consent. Check your lease for a change-of-control clause.
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