Buying a Business – Lease Documentation Review and Settlement

In our previous article, we talked about the importance of contract review and business evaluation in the context of  buying a business. In this article, let’s find out more about what we should do when buying a business.

Step 3: Lease Documentation Review

When buying a business that involves a lease, there are usually two options for taking over the business lease at settlement. They are:

  • Assignment of lease; or
  • Entering into a new lease.

Assignment of lease

Assignment of lease involves the seller assigning their rights under the lease to you as the buyer. This is done through a deed of assignment of lease. This is a legal document that allows for the transfer of the lease from the seller to you. Both the deed of assignment and the current lease will be the legal documents that you will need to review in order to understand your lease obligations after you take over the business.

In most cases, before the seller can assign the lease to you, the seller will need to obtain consent from the landlord. At this point, the landlord will assess your suitability to run the business and continue paying rent under the lease. Once the landlord has provided the consent, generally the landlord will ask their lawyer to prepare the deed of assignment of lease.

It is strongly recommended that you review the lease thoroughly before signing the assignment of lease and some of the key terms to have particular regards to include:

  • The remaining terms of the lease;
  • Any option to renew the lease;
  • The permitted use of the premises;
  • Security bond/bank guarantee;
  • Rent and outgoings;
  • Rent reviews;
  • Relocation clause; and
  • Any special conditions.

If you are uncertain about any terms of the lease, it is important that you seek legal advice to understand your rights and obligations before signing the deed of assignment.

Entering into a new lease

Before you enter into a new lease, the seller will need to terminate or surrender the existing lease with the landlord. This can be done through a deed of surrender of lease, which ends the current lease between the landlord and the seller.

Generally, the date of surrender of the existing lease is the same as the commencement date of your new lease. If you agree to enter into a new lease with the landlord, you will need to review the deed of surrender of lease to confirm the lease has been effectively terminated.

It is the usual practice that the landlord will have their lawyers to prepare lease documents and provide them to you for review. It is important to have the lease document properly reviewed and amended if required. This review will ensure you are not taking on any additional obligations from the previous tenant (i.e. the seller).

Step 4: Pre-settlement, Settlement and After Settlement

Engaging a lawyer can assist you during the settlement process by:

  • Keeping track of crucial compliance and payment dates under the contract;
  • Conducting searches on the business assets to determine if the assets encumbrance free;
  • Conducting searches to confirm the seller owns the business;
  • Making enquiries with the local government on the business licences and registrations required to operate the business;
  • Adjusting all income and expenditure of the business;
  • Submitting the contract for stamp duty assessment;
  • Obtaining employee transfer details; and
  • Liaising with the landlord regarding any defaults by the seller and any other outstanding bills and obligations.

Before settlement, your usual obligations under the contract include:

  • Paying the deposit within the time period specified in the contract;
  • Conducting a stock take;
  • Provide finance approval (if the contract is subject to finance);
  • Complete due diligence (if the contract is subject to due diligence); and
  • Ensuring the assignment of lease or lease document is prepared.

Settlement involves finalising the obligations set out in the contract before or on the settlement date. It is important that the seller will transfer the business name and any other licences to you at settlement. It is your responsibility to contact all the utilities service providers to open any required utility accounts, obtain insurance. Usually, a lawyer will be able to identify and assist you to comply with all of your obligations.

For any questions about buying a business, please don’t hesitate to contact any one of our lawyers at AH2 Legal through 08 6161 0243.