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Wake-up call – avoiding hold-ups in selling a business

19 August 2011
Wake-up call – avoiding hold-ups in selling a business

Selling your business can be traumatic enough without hold-ups caused by property problems. Legal expert Debra Kent explains how to prepare for a sale.

THE PROBLEM
I want to sell my hotel, catering or restaurant business in a few months and want to know how to sort out any property problems so that the sale proceeds smoothly.

THE LAW
Most business property is held under a lease and unless you are selling the shares in the company which runs the business, you will need to assign the lease to the new owners which means you will need to ask the landlord for their consent.

EXPERT ADVICE
The landlord's consent
Most leases granted after 1996 will include a list of matters the landlord may consider when deciding whether to agree to an assignment or not.

The landlord's main concern is that the buyer can pay the rent and comply with all of the lease obligations. This is also important for the seller - particularly if the landlord insists that you guarantee the buyer's performance under the lease.

A landlord usually requires at least three years' accounts (audited if possible), full details of the buyer including directors, shareholders and registered office if it is a company, as well as potentially a business plan and trade references.

If the buyer is a new company and this is its first venture, problems may arise in obtaining landlord's consent. However, there may be ways around this, for example, providing details of financial backing, a business plan and financial information on projected profits. It might also be necessary for the buyer to provide extra security such as guarantors or a rent deposit.

Dilapidations
If the property is run down and in bad repair, then there is probably a breach of the lease and the landlord may be entitled to refuse consent to an assignment. The buyer might also want a discount on the purchase price to take into account the repair costs. It might be worth doing the work yourself.

Other breaches
If there are any other material breaches such as unauthorised alterations, non-compliance with planning law or non-payment of rent, then the landlord is likely to refuse consent. The buyer would usually want these things fixed, too.

New alterations and changes
It is worthwhile reviewing your lease to see what restrictions there are on decorating and alterations. Structural alterations are almost always prohibited, yet many buyers will want to carry out these and other works. Buyers will want to get the landlord's approval to their proposed changes at the same time as obtaining licence to assign.
Consent might also be needed for new signage or changes to the frontage of the building.

Lease variation
A buyer's solicitor will look through the lease to see whether there is anything which makes it less marketable or more onerous on the buyer. Well-prepared sellers will carry out this review before putting the business on the market so that they know of any potential problems.

If there is something that is particularly difficult, such as an overly restrictive use clause or an ambiguous rent clause, it may be worth negotiating with the landlord. Though they rarely agree to vary leases unless the variation is in their favour.

Freehold property
If you own the freehold of your business you might wish to grant a lease to the new owner so that you have the benefit of the sale price as well as rental income from the property. Preparing some basic heads of terms and the draft lease to attach to the sale details might well save time in the selling process.

CHECK LIST

â- Consider the financial strength of any buyer from your own and the landlord's perspective.
â- Make sure there are no breaches or fix them if necessary.
â- Check if there are any outstanding rent reviews or consents and deal with them.
â- Potential alterations - will these be a problem?
â- Are variations to the lease necessary?
â- Ensure the property has all necessary rights.

BEWARE!
As with many things in life, it pays to be prepared. It is not possible to always predict what might slow down a potential sale, but looking at things from a buyer's perspective as well as thinking about what a landlord might require, should certainly help to make the process go more smoothly.

Contact
Debra Kent is a partner at Charles Russell
debra.kent@charlesrussell.co.uk

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