The first time the value of a lease is considered is should be when it is being signed. Understandably, the tenant looks at key items such as rent, additional costs, terms, renewals and any other clauses that may be inserted. After much negotiation, the lease is signed, and the owner begins running the practice.
If only things were truly that simple.
When the lease is first signed, many might not be thinking about the eventual sale. Agreeing to things like demolition and relocation clauses may be required but owners must know how these affect the value of the practice and its potential sale.
Obviously not all clauses are created equal. A demolition clause in a building of 30 stories is very different to one in a stand alone building at the corner of a major intersection. While a sale may not be on the horizon for many years down the road, it is important to pay attention to the finer points of the lease so that when the time does come, the assignment from one owner to the next is as smooth as it can possibly be.
An Interesting Case Study
Recently, we encountered a very interesting and frustrating situation. We successfully found a purchaser for our client. It was a very good fit and all parties were working in good faith towards a successful close.
In the course of a sale, the landlord is almost always notified after due diligence and financing are waived. An owner does not want to prematurely alert a landlord and risk the word getting out that they are selling.
Our situation was following this process nicely. When the time came to seek the landlord’s assignment of the lease it was declined. Even though the lease, and most do, stated that the landlord could not unreasonably withhold the assignment, in this case, it was withheld.
My lawyer friends will always agree that the definition of “unreasonably” is up for debate. However, the landlord was willing to provide clear rationale as to why the assignment was declined. Despite the bank providing an approval for 100% financing, the landlord was not confident in the new owner’s ability to run a successful business.
Many landlords will take a personal net worth statement from the applicant and most applicants withhold information for fear of being overcharged.
Unfortunately, not only did this particular purchaser not complete this exercise properly, the resumé provided did not give the landlord confidence that the purchaser could run a successful business.
The landlord felt this office was a key anchor in his plaza and did not want to risk the future success. The other factors that may have influenced the decision of the landlord lay with the vendor.
In the lease, it was clearly written that the practice could not be sold within two years of the lease being signed. It also required the vendor to notify the landlord prior to listing the office for sale. In this case, both of these requirements were not fulfilled.
A Good Lease Does Impact Value
Owners must be strategic when it comes to the sale of their practices. As a tenant, if you have been difficult or challenging, then it is possible these actions can influence the landlord down the road.
Many owners thought the pandemic, (particularly for those with practices located in retail shopping centres), gave them the opportunity to renegotiate lesser rent or remove such clauses. Unfortunately, this was often not the case. In fact, those seeking a rent reduction often found themselves with additional clauses that were not in the original lease.
Remember, in negotiations, everyone has to give something up in order to get something. Also, it seems that the pandemic made landlords even more cautious than before.
With multiple tenants unable to pay rent due to restrictions and limitations, landlords had added expenses that needed to be covered.
The Federal government may have provided some relief but in the end, the pandemic has certainly taught all of us valuable lessons.
A lease definitely affects the value and sale of a business.
The more carefully the lease is crafted, the better the odds that the practice will sell at a higher price, which helps facilitate an exit strategy for the owner.
By understanding the lease and its contents, the owner stands a greater chance of being more profitable while reducing the inherent risks and exposures that are typical with all commercial lease contracts.
It is very common for things to be left out or misconstrued, whether intentional or not. It is always best to have your lawyer or a qualified expert review the documentation process before a lease is signed.
A final word – make sure renewals are also reviewed carefully. Sometimes in the rush of taking care of this “one or two pager”, items can be included that were not in the original lease.
Practice owners have worked extremely hard to build and operate a successful practice. This practice is an asset that must be protected.
Therefore, regardless of what stage a practice is in, long-term planning and attention to detail are paramount when it comes to leasing commercial space.
JACKIE JOACHIM
Jackie has 30 years of experience in the industry as a former banker and now the Chief Operating Officer of ROI Corporation. Please contact her at Jackie.joachim@roicorp.com or 1-844-764-2020.
