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The business landscape in Southern California has been buzzing with numerous mergers and acquisitions over the past few years. Although the trend has cooled slightly with rising interest rates, the activity remains above historical averages. With this business trend, many entrepreneurs and small business owners find themselves in a new position – having to navigate through the complexities of a lease agreement tied to the sale of their company.
This article will provide an overview of essential clauses in your lease agreement to consider when you’re selling your business and leasing your building to new owners.
Assignment and Subletting Clause
The new owners might want to shift locations or discontinue the operation. In such cases, they may wish to sublet or assign the lease. This clause spells out the terms under which this is possible, helping protect your interests as a landlord.
Lease Term and Extensions
The duration of the lease should align with the strategic plan of the acquiring group. Including option periods to renew the lease under prevailing market conditions can safeguard your interests, providing a layer of flexibility and protection against unfavorable market shifts.
Rent Amount and Escalations
Your lease should clearly state the initial rent and any increases over time. Tying yearly rent increases to inflation can protect your investment in the long run.
Tenant Improvements and Maintenance
This section of the lease defines who is responsible for property maintenance, repairs, and improvements. Ideally, as a property owner, you want the tenant to shoulder these responsibilities, but it may be necessary to make some concessions initially.
Right of First Refusal or Option to Purchase
While a right of first refusal or purchase option can benefit the tenant, they may limit your flexibility as a property owner. Consider alternatives, such as a right of first offer, to maintain some control over future sales.
Business Continuity Provisions
A good lease should outline how quickly repairs will be made following a disaster and who will be responsible for the cost. It should also clarify whether rent will be reduced during this period and how long the lease will be extended to compensate for the downtime.
Termination Clause
This clause determines under what conditions either party can end the lease and any penalties for early termination. To protect your cash flow and potential financing, it’s generally best to avoid termination clauses.
Insurance, Liability, and Environmental Considerations
The lease agreement should clearly state who will carry the insurance on the building, who is responsible for any liability issues, and who will handle any potential environmental damage remediation.
Understanding these crucial elements of a lease agreement can help ensure a smooth transition and protect your interests when selling your business. It is advisable to seek the counsel of a professional business litigation law firm to navigate these complexities.
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