When the Lease Becomes the Deal
You can agree on the price, finish diligence and negotiate the purchase agreement. The deal can still fail because of the lease.
For many businesses, the location is part of what the buyer is buying. A distributor depends on its warehouse. A manufacturer may rely on a facility built around its equipment and production process.
In an asset purchase, buying the business does not automatically give the buyer the seller’s right to occupy that space. The buyer needs a path to keep using it. That may put the landlord at the negotiating table before anyone expected.
Bring the landlord into the deal early
The lease may require consent to an assignment, impose conditions on a transfer or give the landlord rights that affect the proposed sale. Read it before committing to a transaction that depends on staying put.
What must the buyer provide? What can the landlord require? How long might approval take? What happens to the seller’s existing obligations?
Then decide who should open the conversation.
Often, it is the seller. The landlord knows the seller’s payment history and may know little about the buyer. That relationship can help make the introduction.
Put meaningful seller cooperation into the purchase agreement, but do the practical work too. Agree on who will contact the landlord, what information the buyer will provide and how the transition will be explained.
The goal is to learn what the landlord needs while there is still time to address it. One answer can change the deal.
The landlord wants the seller to stay
Consider a fictional buyer acquiring a regional distributor for $8 million. Its leased warehouse holds the inventory and serves as the base for daily deliveries. Moving would mean finding suitable space, relocating stock and keeping orders flowing through the transition.
The landlord will let the buyer take over, but only if the seller remains a personal guarantor during a transition period. A personal guaranty is a promise to pay specified obligations if the tenant does not.
The seller is willing to discuss it. Then the acquisition lender objects.
The landlord wants the seller to remain responsible. The lender wants a clean break. The buyer needs both the warehouse and the financing.
This is why consent and release cannot be treated as the same thing. A landlord’s consent to an assignment does not itself necessarily release the seller from the lease or an existing guaranty. The documents need to establish what ends and what continues.
The seller could remain exposed to a business it no longer controls. The buyer could lose access to a facility its operating plan depends on.
Ask where the SBA draws the line
For an acquisition financed in part with an SBA loan, the conflict raises another question: is the lender’s objection actually an SBA requirement?
If the lender says SBA prohibits the proposed guaranty, ask for the exact provision and how it applies.
SBA’s lending procedures address lease duration, assignments and landlord waivers in specified circumstances. But those provisions do not, by themselves, answer whether the seller may continue guaranteeing the buyer’s lease. Official SBA SOP page
The SBA materials reviewed for this article did not reveal an express provision stating that a seller may never guarantee the buyer’s lease. That does not establish permission. The transaction documents, loan structure, applicable SOP version and other SBA requirements still need review.
Ask:
“Please identify the applicable SBA provision and explain how it prohibits this proposed guaranty.”
The answer may identify an SBA requirement, a lender overlay, meaning the bank’s own additional credit requirement, or the loan officer’s interpretation of a broader rule.
Each calls for a different conversation. A lender policy may need review by the bank’s credit team. A disputed interpretation may need its SBA specialist or counsel to examine the proposed language.
Give everyone the same proposal
Start with the risk the landlord wants covered. Would a short transition guaranty work? Could the seller’s exposure be capped or decline over time? Would additional buyer security address the concern?
These are negotiating possibilities, not approved solutions. Put the proposed terms in front of the landlord, lender and seller so each can identify what works and what remains unresolved.
If the lender still objects, ask who has authority to reconsider the position. Another experienced SBA acquisition lender may assess the proposal differently.
Changing lenders, however, can bring new fees, repeated underwriting and a delayed closing. It is an option to evaluate early, not a last-minute cure.
Three actions before you sign
Read the lease early. Identify consent requirements, possible landlord demands and the existing guaranty.
Enlist the seller. Use the landlord relationship and establish clear responsibilities for securing cooperation.
Test the conflict in writing. Get the lender’s exact authority and work through one proposal with all parties.
When the location is essential, the lease belongs in the acquisition discussion from the beginning. Discovering incompatible conditions near closing leaves everyone negotiating with less time and fewer options.
Buying a business where the lease, financing and acquisition documents all need to work together? Tolbert Legal helps lower middle market buyers identify and resolve the issues that can delay or derail closing. Schedule a call to discuss your acquisition.
This publication is for informational and educational purposes only and is not legal, tax, accounting or investment advice.
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