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Buying or Selling a San Diego Business: Dealing With the Commercial Lease
If you are buying or selling a business in San Diego, one of the most important aspects of the transaction is often handling the transfer/assignment of the commercial lease. Many businesses in San Diego and California rent the space for their store or restaurant or office, etc. Undoubtedly, such space is subject to a commercial lease. Often, the usefulness of the business to a potential buyer depends on remaining in that space. Thus, making sure the lease will transfer to the new owners becomes an important condition for the transaction. A talented and skilled business attorney can help with that process. Depending on how the negotiations with the landlord go, the Business Purchase Agreement might need to be cancelled or adjusted.
The first step is to read the lease; the second is to look to California law. Here is some quick information.
Buying or Selling a San Diego Business: California Law
Under California statutory law, although transferability and assignment may be completely barred, generally transferability and assignment of commercial leases is favored. Under the California Civil Code, a commercial lease may include:
- A full restriction on tenant’s ability to transfer/assign the lease (§ 1995.210)
- Restrictions on transfer based on express standards or conditions (§ 1995.240)
- Approval by landlord for transfer/assignment as long as the lease contains statement that consent shall not be unreasonably withheld (§ 1995.250)
As part of the due diligence for the sale/purchase of the business, the buyer needs to review the lease with particularity. The buyer needs to understand the rent structure, the lease requirements for common area maintenance (“CAM”), for real estate taxes, insurance, and other fees. The buyer should also understand rent escalator clauses and any use restrictions. Assuming the lease is acceptable, the buyer then needs to review the provisions related to transferability/assignment. Assuming the lease can be assigned to the new owner, the next step is to begin discussions with the landlord
Even if the lease explicitly forbids assignment or transfer, the buyer should still begin discussions with the landlord — not for an assignment, but for a new lease. Often, the steps are similar for being approved for an assignment and for being approved as a new tenant. In general, the buyer will provide information or complete application forms. Basically, the landlord wants to determine if the proposed buyer is creditworthy, has sufficient capital and financial resources to continue the business, and can pay the rent, the CAM, and the taxes/insurance due under the lease, including future increases.
Buying or Selling a San Diego Business: Working Toward Solutions
Whether consent is being sought for assignment or a new lease is being negotiated, in the final analysis, the goal is to get an agreement from the landlord. Often, this is the key to consummating the sale or purchase of the business.
In this regard, the buyer may need to accept various additional conditions imposed by the landlord. These might include:
- Increase of security deposit
- Personal guaranty by the buyer’s owners
- Increased rent or CAM or taxes and insurance payments
- Different rules and regulations — for example, reduction in reserved parking spaces or similar
After the negotiations with the landlord are completed, the seller and buyer will often need to revisit various features of the Business Purchase Agreement. A well-drafted agreement will provide that getting the landlord’s consent is a precondition to closing and that certain extra landlord requirements, such as an increased security deposit, will be borne by the seller (or the buyer). Negotiating such pre-conditions at the beginning of a potential sale/purchase is essential.
Buying or Selling a San Diego Business: Contact San Diego Corporate Law
For more information, contact Michael Leonard, Esq. of San Diego Corporate Law by email or by calling (858) 483-9200. Mr. Leonard has the experience to help with the sale or purchase of your San Diego business.
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