Amidst the ongoing recession many business owners are looking for a way out and the most common route is to sell an entire business. It is not unheard of for business owners to privately draw up an agreement with the buyer – without lawyers – exchange monies and say goodbye to the business – believing that this is the end of the chapter. But are there any legal implications and pitfalls of taking this approach? We look closely at the circumstances where a business comprises a leasehold property.
The business lease
More than likely the business will have been operated from a property that has been leased on a 5 year, 10 year or perhaps a longer term. In the context of a business sale, it is imperative to ensure that the business lease is also transferred at the same time – otherwise the end result will be that the buyer owns the business but the seller is still legally tied to the lease. The first step for a seller is to check the conditions of the business lease as landlord’s consent will usually be required. A landlord is duty bound to consider a request for consent to the transfer of the lease (commonly referred to as a lease assignment) and cannot refuse consent unless it is reasonable to do so. In considering the application for consent, the landlord can impose a number of conditions in writing, which are generally standard throughout most lease assignments. If these conditions can be satisfied, then the landlord is under an obligation to grant consent within a reasonable time.
How to request landlord’s consent
A recent decision in the case involving a leading energy supplier, E.On UK plc illustrated the adverse outcome of applying for consent without following the correct procedure. It can often be assumed that in a world ruled by technology where everything is regularly communicated electronically, email would be the most suitable method to make contact. In this case the court ruled that where the lease specifies the method for contacting the landlord, then this must be followed. Email was regarded as unacceptable. To avoid getting this wrong, the lease should be checked for its notice requirements.
A reasonable time for granting landlord’s consent
The law allows a tenant to proceed with an assignment without landlord’s consent where a landlord ignores its statutory duty to consider the consent beyond a reasonable time. In the past courts have ruled against landlords that have taken far too long to give an answer and were considered to have acted improperly with blatant disregard to the statutory duty. It is an established principle of the courts that where the statutory duty has been triggered by the correct service of notice and a tenant has given the landlord all the necessary information, the landlord should respond within two weeks. In the E.On case, the court ruled that 11 days was not a reasonable time to allow a landlord to reach a decision – there is clearly a significant difference between 11 days and 14 days. Needless to say it is better to err on the side of caution and obtain consent in writing in view of the court rulings. The obvious implications of this for a seller will be to ensure that consent is obtained timeously in line with the sale of the business. Time will play a big factor and any proposed deadlines for completion should be discussed in advance with your legal advisor and the buyer so that everyone is on the same page.
A key lesson drawn from the E.On case was that where an assignment takes place without landlord’s consent, the previous tenant can be held to have continuing liability for the terms of the business lease. Essentially, if the buyer stops paying rent, the landlord can pursue the previous tenant for the rent arrears; unfortunate for the seller who believed that he had washed his hands of the business. Those business owners who are oblivious to the legal implications of selling a business using a “DIY” method clearly put themselves at risk. The costs they seek to save in legal fees may eventually land back on their door-step, albeit in another, larger form. Not only will the potential risks leave a bigger hole in your pocket, you are likely to be faced with a legal battle against your landlord for your failure to obtain landlord’s consent. The correct approach is to get the right legal advice at the right time. If you are seeking to sell your business and its lease, contact our commercial property team who can guide you through the process and ensure that you are advised on the legal procedures.
By Afsana Rahim
Commercial Property Solicitor
photo credit: Martin Pettitt