Sean Radue Attorneys
The YourProperty expert has received a commercial property query about the impact of a lease on the purchase of a small business.
The reader has expressed interest in buying a small food and beverage type business that currently operates from a converted, formerly residential, dwelling.
He has only made preliminary enquiries but has asked the experts for some guidance on the aspects he should look out for to protect his investment, should he decide to proceed.
According to Sean Radue of Radue Attorneys in Port Elizabeth, opening up a small business in the hospitality industry has become a popular choice for many entrepreneurs.
“There are a few pertinent issues to consider before signing on the dotted line, so to speak.”
Radue says the business and premises from which the business is operated are typically two different aspects that require a potential purchaser’s attention.
“The current business owner may also own the property the business operates from or he or she may not and merely be a tenant.”
In this particular scenario, the business owner is also the owner of the property, he says.
“Either way, only the business or both the property and the business may be up for sale.”
Radue says it is also important to determine whether the business and the property, which is, in essence, a rental concern, are held under the same entity.
“The reader would need to establish the nature and types of entities he is dealing with as certain formalities may be required due to the type of entity involved.”
He says the initial negotiation between the parties usually revolves around the purchase price.
“While this aspect is important, it’s in the technicalities that any future troubles may lie.”
If the building is not part of the deal and the business is purchased subject to the provisions of the existing lease, the lease must be thoroughly examined, says Radue.
“It’s vital to check for any unusual or undesirable clauses and, very importantly, whether the seller of the business has the option to transfer the lease to the purchaser, usually by way of cession.”
Generally speaking, he says, the purchaser and seller of a business may also elect to approach the building owner to ascertain whether the purchaser could enter into a new lease with the landlord.
“To protect the rights of all concerned, the parties could conclude an agreement for the sale and purchase of the business which is subject to certain suspensive conditions.”
The provisions relating specifically to the sale proceeding would then be suspended pending the fulfilment of certain recorded conditions, says Radue.
“Dealing with the lease would be one aspect, another may be for the reader to carry out a due diligence as to any other aspects that may be relevant.”
He says this would include examining any other contracts he may have to take over, assessment of business staff, examining the financials of the business and the like.
“Where the building is sold as part of the deal, the sale may also be subject to the successful transfer of the building to the purchaser.”
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