Buying a Shop with only 15mths left on lease
Discussion
Looking at a local shop that is up for sale, i.e. the business that is in the shop and has been for over 15years. It's a well known independent, currently bricks and mortar from that location only, no online. Don't have the accounts yet. But the listing details state that the shop lease expires in the summer of 2021.
It's a prime location, absolutely ideal for the trade it's in. But if bigger units came up within 100yards or so it could probably do with a larger unit.
So would you want to secure a lease extension as part of the purchase of the business? What other questions/commitments etc would you ask for?
Think it has huge scope for increasing sales and profitability.
It's a prime location, absolutely ideal for the trade it's in. But if bigger units came up within 100yards or so it could probably do with a larger unit.
So would you want to secure a lease extension as part of the purchase of the business? What other questions/commitments etc would you ask for?
Think it has huge scope for increasing sales and profitability.
Lots of questions to ask. If they've been there a while, the lease 'may' be within the landlord and tenant act '54, meaning that the tenant has security of tenure. Its unlikely, but worth asking. Basically means the tenant can hold over indefinitely (subject to terms) unless any major redevelopment works occur.
Definitely worth asking if a lease extension / new lease could be negotiated in the deal. Nothing to stop you asking the question or speaking with the landlord directly.
Definitely worth asking if a lease extension / new lease could be negotiated in the deal. Nothing to stop you asking the question or speaking with the landlord directly.
It is important to establish if the lease is inside the act. (For the lease to be outside a statutory declaration would have been signed, it will be easy to see if this is so when you review.)
If the lease is inside it gives comfort that you should be able to renew, although note that this is not always the case. If inside, I would be using the short term as a negotiating point with the vendor, pointing out lease uncertainty, what might the rent be etc. If you then purchased the business you could later reverse the tactic as a negotiation with the landlord, the business was on it's knees, threat of on-line etc. It is a tough world for retail landlords and you might be able to re-gear the lease or take a new lease at a lesser rent than existing.
If the lease is outside the act then the strategy needs to be different, if the location is key to the viability of the business it would be worthwhile sounding things out with the landlord. I think it is unlikely you would get the vendor's agreement for a re-gear ahead of buying the business, either this would require a conditional SPA or the vendor would be sticking his neck out.
Remember that most landlords hold properties for the investment return, regardless as to if the lease is inside the act or not a landlord is likely to be happy to re-gear or grant a new lease and indeed he is likely to be more welcoming to an existing tenant given that he has comfort of knowing that his tenant can perform and because he will avoid rental void, agent fees and potentially a business rates exposure on the empty unit.
On a wider note, I would be looking at the repair obligations under the lease and other covenants that the vendor should be in compliance with and which you will take on. This could be another point of negotiation with the vendor, for example if the lease requires decoration every three years if he has not done so you could negotiate the value as an off-set against the purchase. Also how will the purchase be executed? If the intention is that you buy the shares then the lease automatically comes with the purchase, if on the other hand you are buying stock and goodwill the lease will need to be assigned needing landlord consent and most likely payment of landlord fees.
If the lease is inside it gives comfort that you should be able to renew, although note that this is not always the case. If inside, I would be using the short term as a negotiating point with the vendor, pointing out lease uncertainty, what might the rent be etc. If you then purchased the business you could later reverse the tactic as a negotiation with the landlord, the business was on it's knees, threat of on-line etc. It is a tough world for retail landlords and you might be able to re-gear the lease or take a new lease at a lesser rent than existing.
If the lease is outside the act then the strategy needs to be different, if the location is key to the viability of the business it would be worthwhile sounding things out with the landlord. I think it is unlikely you would get the vendor's agreement for a re-gear ahead of buying the business, either this would require a conditional SPA or the vendor would be sticking his neck out.
Remember that most landlords hold properties for the investment return, regardless as to if the lease is inside the act or not a landlord is likely to be happy to re-gear or grant a new lease and indeed he is likely to be more welcoming to an existing tenant given that he has comfort of knowing that his tenant can perform and because he will avoid rental void, agent fees and potentially a business rates exposure on the empty unit.
On a wider note, I would be looking at the repair obligations under the lease and other covenants that the vendor should be in compliance with and which you will take on. This could be another point of negotiation with the vendor, for example if the lease requires decoration every three years if he has not done so you could negotiate the value as an off-set against the purchase. Also how will the purchase be executed? If the intention is that you buy the shares then the lease automatically comes with the purchase, if on the other hand you are buying stock and goodwill the lease will need to be assigned needing landlord consent and most likely payment of landlord fees.
Edited by Keep it stiff on Sunday 1st March 15:19
Bit late on this one, as others have said the key is to make sure the lease is within the L&T Act.
Also, check the rent to see how it compares with others in the locality - is there potential for it to change upon lease expiry? Bare in mind that on renewal the lease is to be renewed to the open market rent, so if this falls then you can try and argue a lower rent.
Don't forget that a lease doesn't have to be renewed straight away, you can 'hold over' for a little while whilst new leases are negotiated or you keep your options open. Some landlords are keen to get things tied up as early as possible, others are a little more relaxed.
Also, check the rent to see how it compares with others in the locality - is there potential for it to change upon lease expiry? Bare in mind that on renewal the lease is to be renewed to the open market rent, so if this falls then you can try and argue a lower rent.
Don't forget that a lease doesn't have to be renewed straight away, you can 'hold over' for a little while whilst new leases are negotiated or you keep your options open. Some landlords are keen to get things tied up as early as possible, others are a little more relaxed.
Just to echo what has already been said - this one comes down to whether or not the lease is within the act.
Further points of consideration....
The likelihood could be that the premises is over rented in today’s market conditions. This can be found on many long term leases where tenants are stuck in historic high rents, upward only rent reviews etc and are therefore forced to pay rents which don’t reflect current market conditions.
The general trend is a downward shift in rents in the retail sector, High Street especially. Hence why you find a lot of commercial property for sale with <5 years on the lease as the LL knows they are in for a big drop come lease renewal.
Providing rents have come down, lease expiry is a very valuable time for renegotiation. If the lease is in the act, the LL has to provide the tenant a new lease on broadly the same terms as before at the current market ITZA/GIA. The LL won’t have the hold over the tenant at this point as the current market rent will be determined by the transactions in the local area.
I would do your research now to what the future rent could be. Providing the lease is within the act and the general shift is downwards in rents, I would be comfortable proceeding in the knowledge that in 5 years it’s renegotiation time.
The problem with asking the existing tenant to extend the lease will be that they have no incentive to drive the best deal from the LL. They are simply looking for an extension to sell the business.
Use the short term as a negotiation on business value if you can and tackle it yourself in 5 years time.
Further points of consideration....
The likelihood could be that the premises is over rented in today’s market conditions. This can be found on many long term leases where tenants are stuck in historic high rents, upward only rent reviews etc and are therefore forced to pay rents which don’t reflect current market conditions.
The general trend is a downward shift in rents in the retail sector, High Street especially. Hence why you find a lot of commercial property for sale with <5 years on the lease as the LL knows they are in for a big drop come lease renewal.
Providing rents have come down, lease expiry is a very valuable time for renegotiation. If the lease is in the act, the LL has to provide the tenant a new lease on broadly the same terms as before at the current market ITZA/GIA. The LL won’t have the hold over the tenant at this point as the current market rent will be determined by the transactions in the local area.
I would do your research now to what the future rent could be. Providing the lease is within the act and the general shift is downwards in rents, I would be comfortable proceeding in the knowledge that in 5 years it’s renegotiation time.
The problem with asking the existing tenant to extend the lease will be that they have no incentive to drive the best deal from the LL. They are simply looking for an extension to sell the business.
Use the short term as a negotiation on business value if you can and tackle it yourself in 5 years time.
Edited by msport123 on Tuesday 3rd March 23:35
I'm a bit late to this but given the OP has undertaken to keep everyone updated, and there is no news, I take it nothing has happened recently.
Of course, coronavirus has changed everything in the retail landscape. Valuations are being severely affected, earnings are down, many companies are on the verge of insolvency. Landlords have a stark choice of offering lease reductions to companies with otherwise healthy accounts that will see them able to ride through a short period of disruption, or suffer long periods of vacant properties.
But while the focus here has been on the lease, there are a million other things the OP is unaware of and I would strongly suggest an appointment with someone who understands the buying / selling of businesses!
Is it an asset sale or share sale? If it's an asset sale is the OP aware that it'll attract TUPE obligations? And that the lease extension won't help him as he'll have to apply for a new lease?
That would also apply if the purchase is for a sole trader business rather than a limited company.
There are all kinds of other matters to be taken into consideration and which the average business owner is completely unaware.
It never ceases to amaze me that people so often go into buying a business without first consulting with someone who knows about these things. Instead they rely on free information from the internet or by asking in forums!
Of course, coronavirus has changed everything in the retail landscape. Valuations are being severely affected, earnings are down, many companies are on the verge of insolvency. Landlords have a stark choice of offering lease reductions to companies with otherwise healthy accounts that will see them able to ride through a short period of disruption, or suffer long periods of vacant properties.
But while the focus here has been on the lease, there are a million other things the OP is unaware of and I would strongly suggest an appointment with someone who understands the buying / selling of businesses!
Is it an asset sale or share sale? If it's an asset sale is the OP aware that it'll attract TUPE obligations? And that the lease extension won't help him as he'll have to apply for a new lease?
That would also apply if the purchase is for a sole trader business rather than a limited company.
There are all kinds of other matters to be taken into consideration and which the average business owner is completely unaware.
It never ceases to amaze me that people so often go into buying a business without first consulting with someone who knows about these things. Instead they rely on free information from the internet or by asking in forums!
Keep it stiff said:
Also how will the purchase be executed? If the intention is that you buy the shares then the lease automatically comes with the purchase, if on the other hand you are buying stock and goodwill the lease will need to be assigned needing landlord consent and most likely payment of landlord fees.
Landlords cannot unreasonably withhold consent to assignment. That's what the law says. In real life, they can create all kinds of problems. They can delay and delay and delay. They can make demands that the new owner provides a PG and jumps through all kinds of other hoops. They can hold the deal to ransom. I have seen numerous deals falls through because of landlord (or landlord's solicitor) problems. Again I would advise the OP to go see an expert who understands the game and knows how to play it. Edited by Keep it stiff on Sunday 1st March 15:19
Mr Overheads said:
What other questions/commitments etc would you ask for?
That's a good question. It's best directed at whoever is employed to do the due diligence on this business.Edited by JackSTC on Tuesday 21st April 11:04
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