Broker Tips

Erin Bonner, LREB
Vice President
Liberty Business Exchange
Dallas

Regarding Lease Assignments, Landlords, and Environmental

Lease Assignments can often be the last and most difficult hurdle to overcome when closing a deal. Extenuating circumstances can still occur in some cases even if you think you have done everything possible on the front end to mitigate Landlord issues.

For instance, we had a dry cleaner for sale that had been established for 20 years – same Owner.  It was a difficult business to sell, as it was with the sales dropping, in part due to the primary Seller exiting the business and closing at 6:00 pm instead of 7:00 pm. So, when we finally found the perfect Buyer with years of experience in top known cleaners, and had all the contingencies of financials signed off, and a willing lender contingent upon the lease assignment for a minimum of 10 years of Lease, we contacted the new Landlord.  New is the key word here.

The Landlord had just closed on about 30 or so strip shopping centers around the country. The first phone call was very disheartening. They informed us they would not extend any leases on dry cleaners anywhere in the country due to potential “Landlord Liability” for environmental concerns – ergo perc spills, etc.

After numerous conversations, they agreed to a least consider the deal sometime in the next 3 months. We had “one shot” with the presentation package. So, we researched in depth the Texas Remediation Fund (formerly TNRCC, now TCQEC) for dry cleaners and gathered reams of information for the Landlord. We had letters from a Texas State Senator and dry cleaning experts who extolled the virtues and capabilities of the Buyer. We obtained Phase 2 environmental records giving the location a clean bill of health, etc. The Landlord was not going to do any research themselves.

Once they reviewed our package (in a thick binder with all the pages in plastic sleeves), they agreed they would consider it if the Buyer secured additional special liability and other insurances. Once this was done, their New York Attorneys drew up a new lease for the Buyer which went back and forth and new lease termination for the seller. At 6:00pm the evening before the deal was set to close, though it was a new lease and not an assignment, they dropped the bombshell that the Seller had to pay just under $12,000 in attorney’s fees. Unfortunately for the Seller, knowing it would take another 6 months to get a second buyer approved, the Seller ate the fees.

Point being, if you have a willing seller and a willing buyer, never give up.  Even if you first get a “no”, keep trying. Do research. Represent your Seller to the best of your ability to get the deal closed. Hold the hands of all parties as long as it takes. Also, if the business is the type that could have environmental issues, advise the Seller in the beginning to order a Phase 1. You don’t want to be 9 months into a listing to find out it can’t pass a Phase 1 or Phase 2.

Normally, you will have the same Landlord by the time the offer comes in that you had in the beginning. Steps you can take to ensure the lease assignment is as smooth as possible under normal conditions:

1. Have the Seller sign a consent form that allows you to contact the Landlord @ the beginning of the listing. Sellers are often averse to doing this due to confidentially. However, the Landlord representative generally handling any lease assignment or new lease is not one and the same as the Property Manager who deals more directly with the other tenants (if in a strip center or office building).

2. Tell the Landlord that you have confidentially listed the business for sale and need to know in advance:

• What document will they require from a prospective Buyer?
  
  
• Are there any financials or other requirements for the Lease Assignment a Buyer will need to meet?
  
  
• Is there a lease transfer fee, and if so, how much?
  
  
• Are they willing to remove the current tenant from total liability of the lease if this new tenant is strong enough, or are they willing to write a brand new lease for the new tenant?
  
  
• Tell them that most any Buyer will be securing an SBA loan to close on the business. And, that SBA requires the length of the lease, including options, to at least equal the number of years of the loan, and that lease options can be at market. Most Landlords who have multiple tenants or properties are fully aware of these conditions.
  
  
• Also, be sure and remind them that even though you don’t know yet which SBA lender will be making the loan, that all SBA lenders are required by regulations to have a Landlord Subordination Agreement for the Lender executed. You will find out very quickly if there are any objections on this.
  
  Wait for their response. They will tell you if the rent is going to increase. And, if it is, put that in your presentation package for the buyers, so it is not an obstacle that rears its head at the ninth hour. Also, find out how long of a process the process will be.

We have always found Landlords actually appreciate the phone call so that it’s no surprise when it comes time to secure the assignment (or new lease, or sub-lease), and they don’t feel angry because their back is against the wall when you call them at the 9th hour and say you need a lease in 5 days – which is one of the primary reasons Landlords have issues with our industry. Elevate our profession by being thorough and up front as soon as possible. 

Note – for those who are not real estate agents/brokers, there may be legal and licensing issues if you contact the Landlord directly. In this case, do what you can do to have the Seller make the phone call. Give the Seller a list of all the questions to ask and report back to you. Or have the Seller’s attorney handle this issue…

Note, as always, at the very beginning of your listing, read the lease. In particular, make sure option to renew is transferable to a new owner/tenant. /And that there is a clause in the assignment section that states the lease assignment may not be reasonable withheld. If there is no lease option to renew, you might have the Seller go ahead and negotiate as many years of lease options (at least at the then prevailing market rates) as they can secure, so this is ready to go when a serious offer is presented on the business.

DISCLAIMER: TABB Broker Tips are presented as written by the author and have not been analyzed for proper legal content. Furthermore, TABB is not responsible for the content of this Broker Tip and members are advised to seek legal counsel before employing any content or recommendations set forth above. This Broker Tip does not express the position or opinion of the association in any way, and is intend as an educational tool only.