Like buying a 1999 Saab convertible: The importance of understanding the commercial lease obligations when buying a bargain business

Like in other times of economic turmoil, bargain businesses are now increasingly on the market. However, just like buying an old car, sometimes the alluringly low upfront price of a business obscures the painful reality of extraordinary costs you’ll have to bear down the track.

As commercial lawyers, we are often asked to assist to review (or prepare) contracts for the sale of businesses and at present are engaged in various such transactions which involve the transfer of existing commercial leases. Often, a pre-condition of the bargain is speed and being able to act quickly on a deal in order to alleviate a seller’s spiralling financial distress. However, for a host of reasons, rushing in can often be perilous for buyers. Among the many risks can be the presence of onerous obligations contained in a premises lease which is being transferred as part of the sale. Unfortunately, in the heat of securing a bargain, many buyers may be tempted to skip the step of properly scrutinising a premises lease before accepting a transfer. Consequently, buyers can later discovering things in the lease that range from the mildly annoying to the utterly disastrous.

For example, leases may include unreasonable fixed rent increases, unconventional rent review procedures for a further term or even an obligation to share access to the premises with an adjoining tenant.  Hidden nasties can also reveal themselves in common lease provisions which, due to the circumstances, only become a problem at the time the new owner has taken possession. Among the more innocuous examples is the obligation contained in many standard Law Institute of Victoria leases requiring a tenant to repaint the premises every 5 years. This could perhaps be particularly annoying if you are buying a business 4.5 years after the commencement of the lease, resulting in a large and unanticipated cost shortly after taking over (see our earlier blog post here regarding reinstatement clauses).

At this time, it is also integral that buyers are across any discussions or agreements which have been undertaken with the landlord for rent-relief as part of the current commercial tenancy relief scheme. This is particularly important if the decision to buy the business is based largely on an assumption that rent relief will be available. In this regard, buyers should ensure rent reduction agreements are properly documented and should seek advice as to their enforceability.

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

2020-09-13T22:37:52+00:00September 13th, 2020|Business Advice, Contracts, Corporate Advisory, Property|Comments Off on Like buying a 1999 Saab convertible: The importance of understanding the commercial lease obligations when buying a bargain business