The lease when you buy a business: assignment, sublease or a new lease

For a café, clinic, salon or shop, the premises are often a large part of what you are paying for. If the lease cannot move to you on workable terms, the business you thought you were buying may not exist on closing day.

This guide explains the three usual ways a buyer takes over premises in British Columbia, what the landlord can usually say about it, and how to build the lease into your purchase agreement so you are not left committed to a deal without a place to operate.

Why the lease is often the deal

When you buy a business that depends on where it is, you are usually buying the right to keep trading from that spot: the foot traffic, the fit-out, the permits tied to the address and the customers who know where to find you. That right comes from the lease, and the lease belongs to the landlord and the current tenant, not to you.

How the lease reaches you depends first on how the deal is structured. In an asset purchase, the seller's company or proprietorship is the tenant, so the lease has to be transferred or replaced. In a share purchase, the tenant company stays the same and only its owners change, so no assignment is usually needed, but many leases treat a change of control as if it were an assignment. Our guide to share purchases and asset purchases explains that choice in more detail.

Three ways to take over the premises

Assignment

An assignment transfers the seller's remaining interest in the lease to you. You step into the tenant's shoes for the rest of the term, on the same rent and conditions. The landlord's consent is normally required, usually in a written consent agreement that you, the seller and the landlord all sign. Many landlords also ask the buyer to sign an assumption agreement, promising directly to pay the rent and perform the tenant's obligations.

Sublease

A sublease leaves the seller as the tenant and makes you the seller's subtenant. It is less common in a business sale because the seller stays on the hook to the landlord and you depend on the seller's lease staying in good standing. It can make sense in narrow cases, such as taking only part of the premises.

A new lease

Sometimes the landlord would rather sign a fresh lease with you. That can be an opportunity to reset the term, add renewal options or fix problem clauses, but the landlord may also use it to raise the rent or change other terms. A new lease is a negotiation, not a formality.

What the landlord can say

British Columbia's Commercial Tenancy Act does not set out a general rule on when a landlord must consent to an assignment or sublease of a commercial lease. In practice, the lease wording does most of the work, so read the clause closely before you sign anything with the seller. Look for:

• The consent standard. Some leases say consent may not be unreasonably withheld; others give the landlord a broad discretion or an outright veto.
• What the landlord can ask for. Financial statements, a business plan, personal guarantees, a larger deposit, or payment of the landlord's legal and administration costs.
• Recapture or termination rights. Some leases let the landlord end the lease instead of consenting, which could leave you with no premises at all.
• Change-of-control wording. In a share purchase, check whether a transfer of shares counts as an assignment that needs consent.
• Continuing liability. Many leases keep the original tenant, and anyone who signed a personal guarantee, liable after an assignment unless the landlord agrees to release them. Sellers often negotiate this; buyers should understand what the seller is asking for in return.

Remaining term, renewals and registration

A business with two years left on its lease and no right to renew is a different purchase from one with ten years of secured occupancy. Check the expiry date, any renewal or extension options (and whether they are personal to the original tenant), the rent review mechanism, the permitted use and any exclusive-use or relocation clauses. If the business relies on equipment or improvements, check what the lease says about removing them, or restoring the premises, when the lease ends.

Also consider registration. Under section 20 of the Land Title Act, an unregistered instrument dealing with land generally does not pass an interest in the land, except against the person who made it. That rule does not apply to a lease of three years or less where the tenant is in actual occupation. For a longer lease, especially one you are paying a premium to acquire, ask whether the lease or a notice of it should be registered on title. Our article on commercial lease clauses to check before you sign covers more of the terms that matter.

Make the lease a condition of your purchase

The landlord is not a party to your purchase agreement, so you cannot make the landlord act on your timetable. Protect yourself in the agreement instead:

• A lease condition. Make the purchase subject to the landlord's written consent to an assignment, or a new lease, on terms satisfactory to you, by a specific date.
• Early approach. Plan when and how the landlord will be approached, and who will supply the information the landlord asks for. Consents can take weeks.
• Seller cooperation and estoppel. Ask the seller to deliver a landlord estoppel certificate or similar confirmation that the lease is in good standing, with no rent arrears or known defaults.
• Closing documents. List the signed consent and assignment, or the new lease, as closing deliveries, so you are not obliged to close without them.

This fits within your wider due diligence before buying a business, alongside permits, contracts, employees and liabilities.

Common traps

• Removing conditions before consent arrives. Once you are firm, a refused or delayed consent becomes your problem.
• Relying on a verbal "no problem" from the property manager. Only the written consent signed by the landlord counts.
• Missing a lease amendment. Ask for the full lease, every amendment and extension, and any side letters. The rent and term may not be what the original document says.
• Overlooking the personal guarantee. If the landlord asks you for a personal guarantee of the lease, understand how long that personal guarantee lasts and what it covers before you agree.

Buying a business with a lease? Have the lease reviewed before you remove conditions

Our business purchase and sale lawyers can review the existing lease and any amendments, explain what the landlord's consent clause requires, prepare or negotiate the assignment, consent and any indemnity or new lease, and tie it all to your purchase agreement and closing.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.