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Who Pays the Landlord When Buying or Selling a Business?

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There are a range of costs to consider when buying or selling a business, but one which is often overlooked are Landlord’s fees.  Many businesses, other than those which operate online, from home, or on a mobile basis, will have a premises where a Lease will need be dealt with as part of the business sale process.

So what types of fees will a Landlord charge and who is responsible for paying them?

Most of the time a Landlord will only on-charge any legal fees which they incur as a result of preparing lease documentation.  Sometimes, a Landlord may also charge their reasonable costs of assessing the buyer to ascertain whether they are a suitable tenant.

Who pays these costs depends on several factors.

Lease assignment

Where a business is being transferred from seller to buyer with an existing lease in place, generally, the REIQ Business Sale Contract (the standard contract used for business sales in Queensland) dictates that the Landlord’s cost are payable by the Seller.  These standard clauses can be varied if the parties agree that the buyer shall pay the Landlord’s costs.  This is generally the case for both retail and non-retail businesses.

Example: Joe is purchasing a restaurant from Helen.  Helen signed a 5 year lease with a 5 year option and has been trading for 2 years already.  The parties use an REIQ Business Sale Contract and do not alter the standard terms other than selecting “Lease Assignment” and not “New Lease”.  Joe, if accepted by the Landlord, is assigned the remaining term of the Lease being 3 years with one remaining 5 year option.  Helen pays the Landlord’s legal costs.

New lease

On occasion, it is appropriate for a Business Sale Contract to be subject to the Landlord granting a new lease to the buyer.  This may occur where the seller’s lease has expired or where the buyer requires significant amendments to the lease currently in place for the business.

The costs of a new lease are payable as follows:

  1. For a retail business – by the Landlord; or
  2. For a non-retail business – by the Buyer (unless the parties amend the standard terms of the sale contract).

Retail leasing is governed by the Retail Shop Leases Act 1994 (Qld) which provides that a Landlord may not charge a tenant for the costs of lease preparation.

Example: Rachel is purchasing a restaurant from Bob.  Bob’s lease expired 4 months ago but the Landlord has permitted him to remain as a tenant on a month-to-month basis as he knew Bob was trying to sell his business.  The business sale contract would be subject to Rachel entering into a new lease with the Landlord.  As the business is a retail business, the costs of the new Lease will be payable by the Landlord.

Example: Lincoln is purchasing an accounting business from Jill.  Jill’s lease has been in place for many years and has 11 months left.  Many of the terms of the lease are outdated and the rent is much higher than market rent (in Lincoln’s opinion).  Lincoln also wishes to negotiate for the Landlord to contribute to a new fitout in the premises.  Although Jill’s lease still has almost one year remaining, the changes required by Lincoln would make a new lease a much better option.  As the business is not-retail, Lincoln would be responsible for the Landlord’s costs in relation to the lease.

There are other costs where a lease is to be dealt with as part of a business sale or purchase and sellers and buyers should seek legal advice on the transaction at the earliest possible opportunity.

The Small Business Lawyer acts for sellers and buyers of businesses on a regular basis and can provide you with expert advice in relation to your sale or purchase.  Please book a free consultation with one of our expert small business lawyers to discuss your business sale or purchase.

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