How Do I Transfer My Lease When Selling My Franchise?

You've found a buyer for your franchise and agreed on a price. Now what happens to the lease? Depending on the agreement you signed with your landlord, transferring the space to the new owner could be straightforward or become one of the biggest obstacles to closing the sale.

How Do I Transfer My Lease to the Buyer?

Start by finding out what your lease actually allows. The terms of the agreement and how you structure the sale will determine what happens next, according to Rob Kravets, a real estate attorney with Fox Rothschild LLP.

The type of sale makes a difference. In an asset sale, the buyer generally sets up a new business entity and takes over the lease through an assignment. If the buyer purchases the existing company through an equity sale, the lease may be able to stay in place without an assignment.

An equity sale may eliminate the need for a formal lease assignment, depending on the agreement. The landlord could still have to approve the change in ownership.

Before signing a purchase agreement, review the lease's assignment provisions. It's also worth requesting an estoppel certificate from the landlord to confirm the remaining lease term and whether the tenant is currently in default.

"There's a lot you can do upfront to build the provisions you'll need later on into your lease," Kravets said. "Leases are creatures of contract. There's not really much implied at law for commercial leases. So it's really critical to get these points in upfront to help the sale down the road go more smoothly."

What if the Landlord Won't Approve the Transfer?

A landlord's main concern is usually whether the buyer can afford to take over the space. The lease determines how much say the landlord has in that decision.

Some agreements allow landlords to withhold consent at their sole discretion. Others say consent cannot be unreasonably withheld. Neither necessarily guarantees a quick answer, which can become a problem when the buyer and seller are trying to establish a closing date.

Kravets prefers to address that uncertainty when negotiating a commercial lease. One approach is to establish financial qualifications that a future buyer must meet.

"If you can get them to agree that you can assign without their consent, just upon prior notice, to those objective standards, that's even better than their consent not being unreasonably withheld," Kravets said. "You've got the objective standards, and then you don't even need their consent. You just give them notice, and that takes the landlord consent issue totally out of play."

When consent is required, a provision giving the landlord 30 days to approve the assignment or provide a specific objection can help keep the transaction moving.

Sellers should also check whether any benefits under the lease are reserved for the original tenant. Renewal options and certain financial concessions may be lost when the lease is assigned to another entity. Depending on the wording, an equity sale could preserve benefits that would otherwise disappear.

Don't Forget the Franchisor's Approval

It's worth talking to the franchisor before getting the landlord involved. The buyer will have to meet the brand's requirements, which could mean completing training or spending money to bring the location up to current standards.

There's also the question of how much time is left on the lease. If it doesn't meet the franchisor's requirements, the buyer and seller may have to work out an extension with the landlord.

Getting these details settled can take time. Make the sale contingent on receiving the necessary approvals so you're not obligated to close before the landlord or franchisor has agreed to the transfer.

Can You Still Owe Rent After Selling Your Franchise?

Possibly, and this is where sellers need to be particularly careful.

Landlords frequently require franchise owners to personally guarantee their commercial leases. Those guarantees often remain enforceable after the lease has been assigned, meaning the seller could still be responsible if the new owner stops paying rent.

Ideally, you'll want the landlord to release you from your personal guarantee when the lease transfers. One way to accomplish that is to have the buyer provide a substitute guarantor whose financial qualifications satisfy the landlord.

If a full release isn't available, sellers can try negotiating a limit on their exposure. A guarantee might remain in effect for another year, for example, or gradually decrease over time.

Some sellers instead obtain an indemnification agreement requiring the buyer to reimburse them for certain losses. That arrangement offers some protection, but it leaves the original obligation in place.

"A release limits the overall universe of risk. It reduces the size of the pie," Kravets said. "Indemnification is great, but it just shifts the liability. It doesn't actually reduce the overall size of the pie. That's why it's not as good as a full release or even some sort of release."

If you're still responsible for the lease after the sale, make sure the landlord continues sending you notices of any defaults and gives you an opportunity to correct them. You don't want to find out the buyer has missed several rent payments only after the landlord comes looking to you for the money.

Practical Takeaways: How Do I Transfer My Lease?

For franchise owners preparing to sell, there are a few steps worth taking before negotiations get too far along:

• Review the lease early. Find out whether the proposed sale requires an assignment, what notice the landlord expects and whether any existing lease benefits could be affected.
• Allow time for approvals. Confirm the buyer meets the franchisor's requirements before seeking landlord consent. Make the sale contingent on receiving both approvals when necessary.
• Address your continuing liability. Ask for a written release of any personal guarantee. If the landlord refuses, work with an attorney to negotiate limits on what you could owe after the sale.

The time to sort out potential lease problems is before the sale is underway. An attorney can help owners understand what their agreement requires and what they may need to negotiate with the landlord.

For more information on franchise transfer requirements and approvals, check out these related articles on 1851 Franchise:

• Do Franchisors Need to Approve My Buyer? What Franchise Sellers Should Know
• How Do Franchise Transfer Fees Work and Who Pays Them?
• What Are Common Franchise Resale Mistakes I Should Avoid?