Landlords can and sometimes do kill business sales by refusing to allow an assignment or sublet of the business lease.
I’ll start by saying that every commercial tenant should seek the advice of a commercial real estate attorney before negotiating and signing a commercial lease, which is very different from a residential lease. A thorough and competent understanding of each term is essential. Within the myriad clauses are loopholes, contradictions, and ambiguities that often can and do lead to financial ruin.
Let's assume that the seller has determined the right time to discuss this issue with the landlord. While that "right moment" is often sooner rather than later, each landlord-tenant relationship is unique. In one situation it may be prudent to discuss a possible sale of the business with the property owner months in advance of pacing the business on the market; in others, it may be best to wait until there is a buyer under contract. A professional business broker can help the business seller determine which is the appropriate approach for the particular situation.
Some landlords will allow the absolute transfer of the lease to a new owner, completely releasing the original tenant. Other landlords will agree to a sub-lease with the original tenant fully at risk, or an assignment with the original tenant held to varying degrees of liability as a guarantor for the remaining term of the lease.
Nevertheless, let’s assume that, once being asked to transfer the tenancy to a new business owner, the landlord refuses to write a new lease, or to permit a sub-lease or assignment of the existing lease.
There are several approaches to a resolution:
1. Persuasion. Often a frank discussion about the economic best interests of the landlord can result in a favorable decision. On the one hand, if the tenant vacates the premises, the landlord will need to sue to enforce the ongoing rent, while at the same time fulfilling the landlords’ obligation to mitigate the tenant’s damages by using reasonable efforts to find a reasonably-qualified party to take over the tenancy; furthermore, the landlord will have no rental income during the time of the vacancy and will often need to pay a commission to the real estate broker who obtains the new tenant. On the other hand, if the landlord cooperates, there is no vacancy, no loss of income, no law suit, no legal fees, and no real estate commissions. Here a business broker can be of crucial importance in providing an objective “reality check” for the intractable landlord and in demonstrating what’s in the best interest of the landlord.
2. Legal action. While most well-drafted commercial leases negotiated in good faith by reasonable parties contain a clause that states that any sublet or assignment is subject to the approval of the landlord, which not be “unreasonably withheld.” As long as the buyer of the business can demonstrate equal or better financial and managerial strength as the current tenant, it would be difficult for the landlord to justify a refusal to consent. In general, a commercial lease that requires landlord approval for transfer automatically implies that the landlord may not withhold consent without a valid reason. Section 1995.2560 of the California Civil Code charges the commercial tenant with the burden of proving that the landlord is acting unreasonably. A tenant making a written request for a formal explanation of a landlord’s refusal may use a landlord’s failure to reasonably respond as proof of the landlords’ unreasonableness. The tenant’s attorney can assert many theories of liability for damages, in addition to the breach of the lease itself, including the loss of the deal for the sale of the business and tortious interference with contract. Whether the tenant’s attorney will prevail in court is often a risk a landlord would prefer not to take, prompting them to reach a reasonable settlement.
3. Strategic re-location. Sometimes there is no alternative to finding alternate premises for operating the business. Of course, this is easier for a business that is not “location-specific” and it is easier when the recalcitrance of the landlord is known in advance. In that case, the seller can make an orderly transition to another location, either before the business sale or planned to coincide with the sale. When not planned in advance, this can have negative consequences for the business seller. I once was selling a business and the owner refused to allow me to speak with landlord in advance, insisting that “there will be no problem” with anew owner taking over the lease. When we finally did have a contract executed and the landlord was consulted, we were told that the landlord would absolutely refuse to transfer occupancy to anew tenant. At the last minute, we had to find nearby retail space to lease; and the seller had to compensate the buyer for the costs of building out the new space and moving the business to the new location.
In all these circumstances, the owner selling a business should not "go it alone." This may very well be the single most important financial transaction of a lifetime, and the services of a licensed experienced professional business broker can be enormously valuable.