I’ll take your business but not your problems! – The importance of understanding lease reinstatement obligations when purchasing a business

Buying an existing business can be an exciting but stressful process. Along with assuming the rights to exploit and grow an existing enterprise, the purchaser also assumes numerous obligations and liabilities. Apart from taking on the responsibility for employees, maintenance of assets and responsibility for ongoing management, part and parcel of the obligations assumed will often be an existing lease of the business premises.

Aside from ensuring that the rent is manageable and that there remains an acceptable lease term remaining, too often the fine print of an existing lease is given little consideration by the purchaser. Those who do delve into some detail will often focus on matters such as whether a security deposit and personal guarantees are required or perhaps the amount of the outgoings on the property.

However, in the process of taking an assignment of the lease on business premises, there are other important items needing consideration which are often overlooked and can cause serious headaches in months or even years down the track.

Among such items that may lay dormant is the existence and extent of any ‘make good’ clauses contained in the lease.  Unfortunately, many business purchasers taking an assignment of an existing lease either:

  1. give no consideration at all as to what the make good obligations are in the lease: or
  2. presume they are only obliged to return the premises to the landlord (at the conclusion of the lease) in the condition that they themselves received them.

The reality is that, unless agreed otherwise, many make-good or reinstatement clauses will require return of the premises to the landlord in the condition they were in at the start of the lease (save for fair wear and tear). This means that it is essential for business purchasers to know what the premises were like at the outset of the lease AND understand the nature and extent of any make good obligations.

Make-good clauses can often provided onerous and expensive obligations including:

  • Removal of equipment and tenant installations;
  • Refinishing and painting all surfaces;
  • Removal of signage;
  • Reinstatement of equipment and or installations which were present at the beginning of the lease (but may have been removed by the vendor of the business). In our experience, this has included items such as large mechanical roller doors, extensive kitchen fixtures, internal office partitions or even fencing. All of which the purchaser was peacefully unaware of at the time of buying the business and taking an assignment on the premises lease.

In circumstances where extensive, costly or onerous make-good obligations are present in a lease, purchasers should factor this into their purchase decision and, if necessary, have this accounted for in the purchase price.

Of course, indispensable to taking an assignment of a lease is sound legal and commercial advice.

If you need advice in relation to appropriate due diligence when buying a business or commercial leasing assistance generally, contact a member of our team for on-point, practical guidance.

Joseph Carneli, Senior Associate

2019-04-29T23:09:56+00:00April 29th, 2019|Business Advice, Contracts, Corporate Advisory|Comments Off on I’ll take your business but not your problems! – The importance of understanding lease reinstatement obligations when purchasing a business