Premise Lease Negotiations

Taking Assignment of a Lease: What a Buyer Should Expect


Ian D. Toms


May 23, 2018

May 23, 2018

When buying a practice, you must consider many aspects including production, staff, current and potential patient base, treatments offered, equipment, state of leasehold improvements and financing. Often overlooked is the fact that you will need to assume the premises lease as a key part of the purchase agreement.

The premises lease must be reviewed and evaluated when you are making your decision whether or not to make an offer to purchase the practice because the lease controls the premises and therefore, the practice “home”. The decision whether to proceed or not with a purchase depends in large part on the lease for the following reasons.

  1. If the lease is impaired, the buyer may not proceed because the bank may not finance the practice purchase because:
  2. the term plus option to renew length may be too short to amortize the loan,
  3. the term length may be too short to amortize the loan because of a landlord’s right to terminate the lease on short notice for building sale, demolition, or renovation, 
  4. the landlord may be able to require the tenant to relocate on short notice at the tenant’s expense, 
  5. the lease may contain a provision prohibiting the bank from securing financing against the premises assets,
  6. the lease may contain obligations on the part of the tenant to renovate the premises at the tenant’s expense.
  7. The buyer may not proceed because certain lease terms and conditions are not acceptable including:
  8. unreasonable rental payments,
  9. impairment because of a restricted use, exclusive, signage, assignment, parking or some other challenging clause,
  10. rights such as options to renew, use, and exclusivity may expire on assignment to the purchaser,
  11. the landlord may exercise his/her right to modify business terms of the lease on assignment such as increasing rent, requiring personal indemnity or exercising the right to terminate the lease instead of agreeing to assignment.

Before you make an offer to purchase, study and understand the lease. Know what it means in the context of your practice both when you take assignment, and in 30 years.

If you decide to make an offer to purchase, the offer should be conditional for a sufficient period of time to ensure that the lease can be assumed in a form acceptable to you. In some cases, the lease is acceptable and can be assigned with the landlord’s consent without much negotiation. This process may still take several weeks. In other cases, certain terms and conditions of the lease need to be negotiated, in addition to assigning the lease from the vendor to the purchaser with landlord’s consent. This is a much more complex and time-consuming process. 

If a number of terms and conditions needs to be negotiated at this critical and time-sensitive time, the vendor may deeply regret not preparing the lease for assignment well in advance because renegotiating lease terms and conditions to satisfy a conditional offer to purchase is very difficult and directly involves the landlord, the vendor, the purchaser, the landlord’s lawyer and the purchaser’s lawyer, as well as possibly both the vendor’s and the purchaser’s brokers. The landlord has significant leverage. If he/she does not cooperate and agree to change certain terms and conditions of the lease, the sale will not be completed and the vendor will not be in a position to retire. 

Further, depending on the sale, either the purchaser or the vendor also has a significant leverage position during the period the lease is being renegotiated. The purchaser’s offer may have been the best offer, and now is conditional only on the landlord agreeing to change one small business term. On the other hand, a buyer may be one of many potential buyers, only able to compete with other offers if the lease is not amended and accepted “as is” In this case the buyer might “win” the bid for the practice but in so doing as assumes an impaired lease.

In any case, renegotiating lease terms and conditions at assignment time involves high pressure and stress. Many deals fall apart because lease changes are so extensive, the landlord refuses to cooperate, or the landlord fails to administer the proposed assignment in a timely manner (i.e. the lease amending negotiation takes months during which time the purchaser loses interest).

As referred to above, some buyers assume an impaired lease, especially in a multiple offer situation. These buyers gamble on the lease being amended after taking assignment, which is also a high stress, high stakes endeavor. I recommend thoroughly knowing the lease and seeking an opinion as to the likelihood of amending the lease following assignment if you choose to take this route.

It is interesting to note that a well-prepared buyer can sift through practice sale listings and find a practice for sale with an impaired lease, and with a little finesse and patience correct the lease that has prevented the practice from selling and maneuver into a position to buy and benefit from this opportunity.

My advice is to have the lease reviewed by a qualified person before making an offer to purchase and devise a strategy for the lease renegotiation and assignment process. This will protect your position by reducing the number of failed purchase offers and improving the negotiation success rate during the amendment of the lease.