Lease assignment when buying a business
Short answer
When a business you're buying rents its premises, you'll either take an assignment of the existing lease (with the landlord's consent, if the lease requires it) or sign a new lease. Check the remaining term and renewal options, because for SBA-financed deals the lease term including options generally needs to be at least as long as the loan term. Also check rent increases, personal guarantees, relocation and demolition clauses, and whether the seller stays liable. Make landlord consent a condition of closing.
For many small businesses the location is the business. A lease you can't get, or one that ends too soon, can make the deal unfinanceable.
Remaining term vs loan term
What to check in the lease
- Assignment clause: consent required, standards, fees, recapture rights.
- Remaining term and renewal options; how options are exercised.
- Rent schedule, escalations, CAM and pass-through charges.
- Personal guarantee requirements; release of the seller.
- Use clause, exclusives, relocation, demolition or redevelopment clauses.
- Defaults or disputes; estoppel certificate from the landlord.
- Related-party landlord? Adjust rent to market. See related-party rent.
Timing: when to approach the landlord
Too early, and you may alarm a landlord about a deal that never happens, or breach the seller's confidentiality. Too late, and the landlord's answer arrives after you've spent on diligence. A common sequence: read the lease right after the NDA; flag assignment, options and recapture issues before the LOI; make landlord consent a condition in the LOI; approach the landlord, with the seller, soon after the LOI is signed; and get the consent, estoppel and any new terms in writing well before closing. Landlords move on their own schedules, so this is often the item that sets the closing date.
Worked example: does the lease cover the loan?
Illustrative example, not legal advice
You're financing a purchase with a 10-year SBA 7(a) loan. The lease has 4 years left, with two 5-year renewal options. If the options are exercisable by the tenant alone (you, after assignment) and not subject to the landlord's approval, the term including options is 4 + 5 + 5 = 14 years, longer than the loan, which is what SBA lenders generally want to see. If the options say "subject to landlord's consent" or are personal to the original tenant and lapse on assignment, the lender may count only the 4 years, and the deal may not finance without a new lease or an extension. Rent matters too: if base rent is $6,000 a month with 3% annual increases, by year 10 it's about $6,000 × 1.03^9 = $7,829 a month. Put that in your projections, because the business pays it whether sales grow or not.
Assignment, sublease or new lease
| Route | How it works | Watch for |
|---|---|---|
| Assignment | Your entity takes over the existing lease | Seller may stay liable; options must survive; landlord consent |
| New lease | You sign a fresh lease with the landlord | Higher rent or new guarantee; but you can negotiate term and options |
| Sublease | The seller stays tenant and sublets to you | Rarely suitable for a purchase; lenders usually dislike it; you depend on the seller's lease |
| Stock purchase | The tenant entity doesn't change | Change-of-control clauses may still require consent |
Ask for an estoppel certificate from the landlord either way: a signed statement confirming the lease terms, that rent is current and that there are no defaults. It protects you from surprises the seller didn't mention.
Red flags in a lease
- A recapture clause that lets the landlord terminate when you ask to assign.
- A demolition, relocation or redevelopment clause that lets the landlord move or end the lease.
- Options personal to the original tenant.
- Rent well below market because the landlord is the seller; it will reset after closing. See related-party rent adjustments.
- Large unpaid CAM reconciliations or a landlord dispute in progress.
- A use clause that doesn't match what the business does, or no exclusive when a competitor could move in next door.
- Accessibility or code problems the lease makes the tenant responsible for.
Worked example: what a rent reset does to earnings
Illustrative example, not market rents
The seller owns the building through a separate company and charges the business $3,500 a month. Market rent for similar space is $6,000. If you buy the business and lease the building from the seller, the rent will likely move toward market: $2,500 a month more, $30,000 a year. If the business's SDE is $210,000, the real figure under a market lease is $180,000. At a 3.0 multiple (illustration only), that's $90,000 of price difference created by one line. Ask for the related-party lease terms in writing, get a broker's or appraiser's view of market rent, and use the rent you'll actually pay in your numbers. SBA lenders and appraisers make the same adjustment.
In the deal
- Landlord consent or new lease as a closing condition.
- Talk to the landlord early, with the seller's agreement.
- Lender review of the lease against the loan term.
Questions to ask the landlord (with the seller's permission)
- Will you consent to an assignment to my entity, and on what conditions?
- Will you confirm in writing that the renewal options survive the assignment?
- Do you need a personal guarantee from me, and can it be limited or burn off over time?
- Is the tenant current on rent and CAM, and are there any disputes or defaults?
- Are there plans to redevelop, sell or change the property?
- Will you sign an estoppel certificate confirming the lease terms before closing?
Estoppel and SNDA: two letters lenders often want
An estoppel certificate is a signed statement from the landlord confirming the lease terms, the rent, that there are no defaults and no unpaid amounts, and what the remaining term and options are. It stops the landlord later claiming something different from what you relied on. A subordination, non-disturbance and attornment agreement (SNDA) deals with the landlord's own lender: it confirms that if the landlord's lender forecloses, your lease continues as long as you keep paying. Ask your lender early whether it will require either, because landlords and their lenders can take weeks to sign.
Personal guarantees on the lease
Landlords often ask a new tenant's owner to guarantee the lease personally, on top of the guarantee you give the SBA lender. Ask whether the seller's guarantee will be released when you take over, and negotiate the scope of yours: a cap, a time limit or a guarantee that burns off after a period of on-time payments.
Repairs, maintenance and the building
Read who pays for what. Many commercial leases make the tenant responsible for repairs, HVAC, plumbing and sometimes the roof, plus a share of property taxes, insurance and common area costs. Ask the seller for three years of these charges and any year-end reconciliations, and walk the premises with someone who can spot expensive items like an aging HVAC unit. If the lease makes you responsible, that cost is yours from closing day.
Ask the landlord, too, whether any changes to the property are planned: redevelopment, a new anchor tenant, parking changes or major repairs passed through to tenants. Each can change your traffic or your costs during the term.
Frequently asked questions
Does the landlord have to approve a lease assignment?
If the lease requires consent, yes. Many commercial leases do, and some let the landlord change terms or charge a fee. Read the assignment clause early.
How long does the lease need to be for an SBA loan?
Under SOP 50 10 8.1, the lease term including options should generally be at least the loan term where the premises are essential. Confirm with your lender.
Will I have to personally guarantee the lease?
Often. Landlords frequently ask the new owner for a personal guarantee, especially for a new entity.
Assignment or new lease: which is better?
It depends. A new lease can reset term and terms; an assignment keeps existing rent. Negotiate both if possible.
What is a recapture clause in a commercial lease?
A clause that lets the landlord take the space back, instead of consenting to an assignment, when the tenant asks to assign. If the lease has one, asking for consent can give the landlord a chance to end the lease. Have your attorney read the clause before anyone approaches the landlord.
Can the landlord raise the rent as a condition of consent?
It depends on the lease and state law. Some leases let the landlord withhold consent unless conditions are met, and landlords often use an assignment to ask for higher rent, a new guarantee or a longer term. Price that possibility into your plan, and negotiate the new terms before you're committed to the purchase.
Sources
- SBA SOP 50 10 8.1 (lease term and collateral requirements)
- Cornell LII: Assignment
- ADA Title III regulations, 28 CFR Part 36 (accessibility of leased public accommodations)
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.