Seminars

Lease Assignments: What to Know when Selling Your Practice

 

It’s time. You have been thinking about selling your practice, and now you’re starting the process. You’ve put it up for sale, and after a while, you’ve gained potential buyers. You know the sale of your practice is getting close, and you want to make sure all of your bases are covered. Problem is, you signed a years-long lease to house your practice, and that lease will not expire until long after you’ve packed up and left.

How can you get out of your lease legally, without severe penalties, and at the same time not be responsible for future payments and obligations after you’ve passed the keys onto a new tenant? One of the best ways to solve this problem is to have a lease assignment. Read on to find out what a lease assignment is and how it can help you when selling your practice.

What is a lease assignment?

A lease assignment is what you can use when you want to transfer your lease to someone else. This would be the person buying your practice and moving into the location, otherwise called the “assignee”. This lease assignment transfers all of your remaining interest in the lease from you, the “assignor”, to the assignee. The assignee takes over your lease when you move out. From there, the landlord and assignee deal with each other directly. The assignment may require you to remain as a guarantor for the remaining term of the lease. It is pretty common for landlords to require the owner to remain on as a guarantor for a period of time in a lease assignment. If that is the case, then the buyer should indemnify the owner, and that provision is usually included in the purchase agreement.

How can I acquire a lease assignment?

Before choosing to proceed with a lease assignment, first check the language of your current lease to see if you are allowed to assign the lease. In most cases, there should be a provision that states, “the landlord will not unreasonably withhold the approval of an assignment”.

If you are able to assign the lease, you will need to acquire an “Assignment of Lease Agreement”. The Assignment of Lease Agreement is the document that verifies the transfer from the original tenant to the incoming tenant.

In most cases, the landlord will need to consent to the lease transfer through a document called “License to Assign”. This document grants formal written permission to assign and transfer a lease from one tenant to another. The License to Assign is important because if it is not signed or approved by the landlord, they may refuse to approve the assignment later on.

The lease assignment can be drafted by the landlord, tenant, attorney, or broker. Always request that the landlord remove you as a guarantor from the lease assignment. They may be reluctant, however, if the buyer is new. Purchase agreements will have provisions that indemnify you from liabilities, like the lease after the sale date. Regardless, landlords always have a duty to mitigate damages in case of a default.

How is an assignment different than a sublease?

Although they may seem similar, a sublease is indeed different than a lease assignment. With a sublease, you the assignor are responsible for the correspondence between the landlord and new tenant. Generally speaking, you would play the part of the middle-man with a sublease.

However, with a lease assignment, there is a direct relationship established between the new tenant and the landlord, so you do not have to be involved as a go-between.

Why a lease assignment works in your favor:

Here are some reasons why a lease assignment can work best for you:

  • A landlord is usually more in favor of an assignment than a sublease.
  • A lease assignment may let you transfer responsibilities to another tenant/ buyer
  • There is a direct relationship established between the new tenant and the landlord, with little to no involvement on your part.
  • You can outline the terms for assigning responsibilities and obligations of the lease to the assignee.
  • The buyer may need an extension of the length of time for the lease to satisfy their lender requirements.

What to look out for:

Here are some provisions to keep in mind regarding lease assignments:

  • All parties need to consent to the new lease and terms. If all parties do not, the agreement can be refused or rejected.
  • Provisions in the agreement might include a requirement that the assignee have a net worth or experience equal to or greater than the current tenant.
  • Determine what items the landlord will need from the buyer and/ or yourself, including any fees.
  • Is there a termination provision? Some landlords include a termination clause that allows them to terminate your lease if you request an assignment.
  • You may remain a continuing guarantor on the lease if the assignee fails to pay.
  • The better the location your lease is in, the less a landlord is willing to compromise on terms.
  • Make sure that any options run with the lease and the new tenant.
  • Have a professional review the document before it’s signed, especially if the lease assignment was drafted by your landlord. You want to make sure the agreement works for you and is not significantly in favor of the landlord.
  • The buyer may need a term (including options) of 5 to 10 years. Make sure the landlord is willing to extend the lease assignment for the new buyer.

It is smart to know of the options available to you in ending or changing a lease when it comes to selling your practice. Understanding the terms of your lease and the provisions to be able to transfer that lease to a buyer are important in maintaining the value of your practice and having a successful sale.

 

Sources:

Leasing Agreements: What you Don’t Know can Hurt You by Alissa Wald, OD, and Scott Daniels

http://real-estate.lawyers.com/landlord-tenant-law/subleasing-and-assignment-of-leases.html

http://www.propertyshark.com/mason/text/infopages/Real-Estate-Glossary/assignment-of-lease.html

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