Make sure that you have a registered lease in place and ensure that you have at least ten years (including current term and options) left to run on your lease before you list for sale.
Why should I have a registered lease in place?
A registered lease means as long as you are not in breach of any of the conditions of your lease, you have the right to occupy your premises. This gives you the ability to continue to operate your business and generate profit for the period of time set out in the lease. If you are selling this gives the buyer certainty that they can recoup their outlay over the long term.
What happens if I don’t have a lease in place?
If you don’t have a lease in place the landlord may at any time ask you to leave the premises and they are within their legal rights to do so. This means you have no certainty or security that you are able to generate profits over the longer term. We have seen this happen and it is unfortunate as not only does the business owner have nothing to sell but usually they have to return the premises to its original condition. This can mean removing equipment, painting walls etc. Without a lease, the buyer has no guarantee that they can continue to run the business from the premises, therefore the business usually becomes worthless.
What if I have a handshake agreement with my landlord?
A handshake agreement does not constitute a lease. If you have a handshake agreement with your landlord you are at the mercy of your landlord changing their mind. We saw a case several years ago where the sellers of a supermarket had a handshake agreement with their landlord. The landlord sold the premises whilst their supermarket was on the market and the new landlord would not give them a lease. The new landlord forced them out of their premises and now owns the supermarket where their store used to be. If they had a lease in place their business would have sold somewhere around $500,000. This was a very costly mistake for the sellers.
Why does my lease need to be ten years?
We recommend a seller having ten years on their lease for the following reasons:
- Most banks and financiers want the security of a ten year lease to enable the buyer to pay their loan back over this period of time.
- A ten year lease provides the buyer with the ability to make profits in this location for the next ten years; this allows them an adequate return on their investment.
Supermarkets still sell with leases as short as 3 years; however the price paid for the business is usually lower than businesses with a longer lease in place.