What Happens to Business Leases When You Sell in Florida?
For many Florida business owners, the lease on their commercial space is one of the most overlooked, and most important, pieces of a business sale. It’s not glamorous like the purchase price or the earnout, but a lease issue can hold up a deal, reduce your sale price, or kill the transaction entirely. Here’s what you need to know.
Why the Lease Matters So Much
Most businesses that operate from a physical location, retail, restaurants, service businesses, medical practices, and others, are dependent on that location. The lease is what gives the business (and its new owner) the right to be there. Without a viable lease, there’s no business location, and in many cases, no business.
Buyers know this. They’re not going to pay hundreds of thousands of dollars for a business if they can’t be confident they’ll have a place to operate it after they take over. And lenders, including SBA lenders, typically require that the lease term extends at least as long as the loan repayment period.
The Two Main Options: Assignment or New Lease
When a business is sold, there are two ways to handle the lease:
Assignment: The existing lease is transferred from the seller to the buyer. The buyer steps into the seller’s shoes and takes over the obligations of the lease as-is. This is the cleaner option, but it typically requires the landlord’s written consent.
New lease: The landlord terminates the seller’s lease and enters into a brand new lease directly with the buyer. This gives the buyer a fresh start and the opportunity to negotiate terms, but it also gives the landlord an opportunity to raise the rent or change terms significantly.
Which route is better depends on your specific lease terms, your relationship with the landlord, and how much time is remaining on the current lease.
What Most Commercial Leases Say
Most commercial leases in Florida include an anti-assignment clause, which means you can’t transfer the lease to a new tenant without the landlord’s consent. This gives the landlord a significant amount of leverage in the transaction.
Landlords can’t unreasonably withhold consent in most situations, but they can impose conditions, like requiring the new tenant to meet a financial threshold, paying an assignment fee, or resetting the lease to current market rent if the current lease is below market.
Talking to Your Landlord
One of the most important things you can do before you go to market is have a preliminary conversation with your landlord about the possibility of a future sale. You don’t need to be definitive, but understanding their general attitude toward an assignment, and whether they’d be willing to cooperate, is critical information for setting buyer expectations.
In some cases, landlords are cooperative and straightforward. In others, they may see the sale as an opportunity to renegotiate unfavorable lease terms. Knowing which situation you’re in early gives you time to manage it.
Lease Term and Remaining Time
Buyers and lenders want to see meaningful time remaining on the lease. As a general rule of thumb:
- Three to five years remaining is acceptable for most transactions
- Less than two years remaining is a serious concern that can make the business very difficult to sell
- Ten or more years remaining (or a strong renewal option) is a significant value add
If your lease is running short, consider approaching your landlord about an extension before listing the business. Even an informal letter of intent from the landlord confirming their willingness to renew can help calm buyer and lender concerns.
Lease Issues That Kill Deals
Common lease-related deal killers include:
- A landlord who refuses to consent to assignment without extreme conditions
- A lease with a remaining term too short for the buyer’s lender to approve financing
- Personally guaranteed lease obligations the seller can’t get released from
- Prohibited use clauses that would prevent a buyer from operating a different or expanded version of the business
- Below-market leases the landlord wants to reset at closing
Get Ahead of Lease Issues Early
The time to deal with lease issues is before you go to market, not after you have a buyer waiting at the closing table. Review your lease carefully with an attorney, understand what consent is required for an assignment, and have a plan for how you’ll approach your landlord.
Ready to get started on your business sale? Use our free business valuation calculator for a quick estimate of your business value, or reach out for a free consultation where we can discuss your specific lease situation and what it means for your sale.
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