Can I sell half of a commercial lease?

[Leira]

Hello everyone!

I'm new here and hoping to find some friendly advice! This probably seems like a silly question but these are tough times and i'm trying to find solutions;

I own a commercial (restaurant) lease with a business partner and our names are both on the lease agreement. The business partner and I have split (I left the business last year) due to their incompetence and unprofessionalism and I want to sell the lease to get my money back and MOVE ON. Since our split, the restaurant has been run very badly by this ex business partner and is in a bit of debt and not doing well, with good chefs leaving due to the ex business partner's bad/abusive attitude and mismanagement.

It sounds crazy but I actually want the restaurant to fail and close down so that they will have to agree to sell the lease!

QUESTION:
My ex-business partner is refusing to agree to sell (or rather, "RE-ASSIGN THE LEASE"), so i am wondering if i can put my half of the lease up for sale?

I am guessing not, but thought maybe some of you pros out there might know some tricks!

My 2nd plan would be to get some valuations done and hopefully encourage the ex-business partner to sell based on healthy looking offers. Our restaurant has high-spec interior design and fittings and is located in a very popular and trendy part of London where similar property leases go for big bucks.

THANKS, NEW FRIENDS!

 

[Clinton]

I want to sell the lease to get my money back...!

How much of money did you invest ... and what exactly did you spend that money on?

 

[Leira]

Thanks for your question. I am talking specifically about getting back the half of the lease amount i paid. On paper we each paid £30,000 for the lease. Have you ever heard of anyone selling one half of a lease ? I think it must be pretty unheard of...!?!

 

[Clinton]

The answer is yes and no.

When you left the business, what was the deal? If it is a limited company and you are a 50% shareholder, simply "leaving the business" (stopping work) does not mean you're not still half owner. If you're half owner then you can sell that half ownership of the business (including 50% of the lease).

In theory.

In practice I can't see any buyer putting money into buying 50% of a business where there's a major dispute between the two owners, where one has walked away, and where there's a high possibility of the business failing.

My 2nd plan would be to get some valuations done and hopefully encourage the ex-business partner to sell based on healthy looking offers. Our restaurant has high-spec interior design and fittings and is located in a very popular and trendy part of London...

Er, you're assuming healthy looking offers. I'm not so sure you'll get them. You paint a dismal picture of the business and the current owner and you think you're going to get "healthy offers"?!

The high spec design etc is worthless if you're not selling as a going concern.

 

[fisicx]

...the restaurant has been run very badly by this ex business partner and is in a bit of debt and not doing well....
....It sounds crazy but I actually want the restaurant to fail and close down so that they will have to agree to sell the lease!
...hopefully encourage the ex-business partner to sell based on healthy looking offers.

That's a lot of ifs and buts. A failing business won't attract healthy offers and people will want the whole lease not half of it.

 

[Leira]

AS A DISCLAIMER, i am not actually involved in the situation as i originally stated, im the wife of the person wanting to sell the lease but wanted to write from "my" perspective as i thought it would get complicated otherwise. So i will try and answer questions as best i can!

Thanks so much for your help so far! I can see your point, and i dont really think anyone in their right mind would buy half a lease, either. Agreed.
Now, I know it's a common mistake to think of a Commercial Lease as 'property', but i tend to do that. Maybe you can explain it clearly to me? If a commercial property has a thriving business tenant and another one has a failing business tenant, whats the difference to someone buying the keys to the door? If they can be shown that the business failed because of poor management and not poor footfall etc, can't it still be an attractive thing?
Even crappy looking greasy spoons, cafes and small restaurants in the same street and surrounds are up for big premiums, between £150,000 - £450,000!

 

[Leira]

PS: The landlord has already agreed it is happy to provide an Re Assignment of Lease to the new party (with a fee, of course)

 

[Clinton]

If a commercial property has a thriving business tenant and another one has a failing business tenant, whats the difference to someone buying the keys to the door?

All the difference in the world. In the first case the buyer is acquiring a going concern, a running business. He pays to buy everything, from the goodwill to the stock to the furniture (and the lease). He continues running the business in the current name. The vendor, you, gets paid a lot more than the value of the lease.

In the failing tenant scenario he's buying just the right to use the property. He'll rip all your interior decoration out, replace the sign above the door. In fact, he'll factor in a cost for doing all that work and reduce his bid by the extent of his estimate for the work involved.

If they can be shown that the business failed because of poor management and not poor footfall etc, can't it still be an attractive thing?

No. Nice try, but it doesn't work that way.

 

[Leira]

So when 'he' (the purchaser), acquires the lease he becomes the owner of the business that's operated INSIDE it?

 

[Leira]

Also, in the second scenario (the failing tenant) I can see that he'd want to re-invent the place with a new name and concept, but I doubt very much he would rip out the interiors?? They are top spec and the actual restaurant itself had rave reviews - they got top 10 best restaurants in The Daily Telegraph 2 years ago. EDIT: BUT YES! I CAN SEE THAT IN THEORY, IN THE 'FAILING TENANT' SCENARIO, THEY WOULD FACTOR IN NEEDING TO REBRAND OR REDO WORKS ON THE INTERIOR. IN THIS CASE, THEY BOUGHT THE LEASE CHEAP BECAUSE IT WAS A WRECK WHEN THEY ACQUIRED IT, INFACT, THEY HAD TO COMPLETELY GUT IT AND RENNOVATE. SO I DON'T KNOW WHY SELLING IT NOW, THE NEW PURCHASER WOULD CONSIDER HAVING TO RIP IT APART, IF IT'S SO TIP TOP ALREADY WITH A WORLD CLASS KITCHEN ETC..?

 

[Leira]

I'm just the wife trying to do some research to help resolve a very ugly and stressful situation and no i don't know all that much about Leases and so on. I'm very grateful for all your help!!

 

[fisicx]

What is in the lease? Is it just the right to use of the building? If so then they will not be buying the business. That will be a separate negotiation as the kitchens, decor and all the fixtures and fitting belong to the business not the freeholder.

If the business fails then the administrator will sell off all the chairs and tables and whatever to pay off the creditors. All that will be left is the empty shell. You can then sell the lease at a knock down price.

 

[Leira]

Hi Fisicx, thanks so much for your insight on this. If the ex-business partner agrees to sell, then the deal would ideally include all the fixtures & fittings (including tables, chairs, tableware, diningware, top quality kitchen equipment etc) with the Lease re-assignment.

However, if the business fails then here's my question (relating to your comment):
- would all the kitchen equipment/tables/chairs/everything HAVE to be sold to pay off debts to staff or food suppliers BEFORE SALE (so it would be more unattractive "empty shell" to a potential buyer) OR could they not just sell the lease with interiors intact, and then use that money from the sale, to pay off debts?

Please note, the rent to the Landlord IS up to date, so there are no debts with THEM (BECAUSE THERE ARE 2 OTHER SUCCESSFUL RESTAURANTS UNDER GOOD MANAGEMENT THAT CAN BUMP UP FUNDS FOR RENT IN EMERGENCIES) More like bad credit with food and drink suppliers and possibly staff.

 

[Clinton]

If the business fails then the administrator will sell off all the chairs and tables and whatever to pay off the creditors. All that will be left is the empty shell. You can then sell the lease at a knock down price.

Er, won't the administrator take all the assets including the lease?

Leira, administrators try to sell the whole package, but it's a distressed sale and they won't put a great deal of time and effort into finding a buyer for the complete package. If they can't find such a buyer they'll break assets down and sell them individually.

but I doubt very much he would rip out the interiors??

Yes, he would. Even if he doesn't, he would pretend that he does need to rip it out to replace with different equipment. He's not going to pay you out of the goodness of his heart. If he does pay it'll be £1 over scrap value i.e. £1 more than what you would get if you ripped all that equipment out and sold it somewhere else.

But even that's a moot point. You've got to get your head around the difference between selling a going concern and selling a lease with no operating business in it. In the case of the latter it would be up to you to settle all business debts and close the business first... otherwise you can't sell just the lease.

 

[Leira]

Ahh yes i see your points. I am beginning to understand that a lease can either include a functioning business or just be a "space" that needs turning into a business by the new occupant, but they will be 'sold' for very different amounts -- Am i understanding correctly? Ideally the business would close and settle it's debts somehow before putting the Lease up for re-assignment then. But that's in an ideal world, my partner and I are not aware of the up-to-date debt situation so i don't know if it's an achievable amount or not.

EDIT; and if i also understand correctly, while it is sometimes possible to sell half a lease, it would need to be a thriving and attractive business in order to encourage someone in to invest? Even if they were just investing in half of the property as a property investment and assuming the business was failing?

 

[Clinton]

Forget about selling half the lease. From my many years of experience, trust me, you won't get sale for half your lease.

On everything else, yes, you're getting there

 

[Leira]

Ahh thank you so much! Yes I did have the feeling it was rather impossible, hence my opening up the question on here,haha! But i just really wanted to understand it all in a bit more detail so you've been most helpful. We have a nice solicitor to aid the process but she talks as though I know all these "basics" (about the lease and what is IS -i was always confused about if it means the business inside it or just the space, because think of buying a lease in a new-build for example?!?) and it's hard to ask silly questions! At least on here no-one can see me blushing!

 

[Leira]

Hi, Leira here again! Hopefully someone can help clear up a query i had, Just because further research has puzzled me: My partner is co-signer on a Commercial lease. Now, does this mean that my partner OWNS the property or RENTS the property? Or neither..!?

 

[Scalloway]

As far as I understand a co-signer guarantees the rent payments but doesn't actually have any interest in the lease.

 

[Chris Ashdown]

You need to check fully what he has signed as normally this may mean he is liable for the lease payments either in partnership or on his own for the lease payments over the whole life of the lease so if say the company folds and the other signee has no money then the landlord would come after your husband for the rent owed for the remainder of the lease period

I would suggest legal advice to double check out fully what he has signed

 

[Leira]

Ok, thanks both of you. I am still confused though. Let's simplify it by imagining he's the only name on the lease. He bought the Lease for £60,000 and has his name on the Lease Agreement document. Yes, he is liable for paying rent however, his landlord has agreed a Re-Assignment is possible to enable him to get out of it if ness. However, does he OWN that lease or is he RENTING the property from the landlord?? I am confused!! Is there a hierarchy here of BUILDING OWNER > LANDLORD > LEASEHOLDER > RENTER ??? And if so, my husband, "owning" the lease makes him what exactly?

 

[Leira]

CORRECTION!! MY HUSBAND IS NOT "CO-SIGNER", HE AND THE BUSINESS PARTNER ARE 50/50 OWNER OF THE LEASE sorry for confusing matters

 

[Scalloway]

If he has signed the lease he has the right to use the property for the period of the lease then he either hands it back to the landlord or agrees terms for a further lease.

 

[Leira]

I'm really grateful for your assistance but you have not answered my question really, im afraid. So having the lease agreement he has the right to use the property, understood, but what about the £60,000 that was paid to "buy" the lease? Surely he receives that back by selling it on to the new person wanting to buy the lease from him (and the landlord agrees a re-assignment is fine). HE DOESN'T JUST HAND IT BACK TO THE LANDLORD AND WALK OFF WITH NOTHING RIGHT?!? OR AM I MISUNDERSTANDING WHAT A LEASE ACTUALLY IS... AS I'VE ASKED TO HAVE IT EXPLAINED TO ME.! IS A LEASE JUST A PERMISSION TO RENT A PLACE LONGER TERM? OR IS IT OWNERSHIP IN SOME WAY??!!?!

EXAMPLE : So Mr. X wants to buy the lease from my husband, pays a premium to get his name on the lease and my husband receives the money, right? (assuming in a scenario all rents had been paid and no debt, as well as landlord agreeing to reassign).

 

[Clinton]

Lease of a flat: You pay £150K and you "buy" a 100 year lease. For 100 years you pay no rent (but you will have to pay the landlord, or the "freehold" owner some ground rent and for upkeep of the roof and other communal areas). After 100 years are up you have no more right to the property. During the 100 years you can sell the remainder of the lease. So after 20 years of ownership you could sell an 80 year lease.

Typical business lease: You sign a document and pay nothing upfront but agree to pay the amount by way of monthly instalments for, say, 10 years. During that time, unlike with a rented flat, you cannot just walk away. You are committed for the entire 10 years. But you can assign (if the contract permits it and the landlord agrees the assisgnee). In your case the £60K payment and what it's for would be described in the contract. It's unlikely (but not impossible) that you have bought long term use of the property (as in the flat example above) for the small sum of £60K. It could be that the landlord didn't think you were credit worthy enough so took some payment in advance.

Read. The. Contract.

 

[Leira]

Hi Clinton, thank you for explaining the hypothetical differences that was really helpful. I will indeed have to speak to my partner and look at the contract to understand further.

In the case you've described here: "But you can assign (if the contract permits it and the landlord agrees the assisgnee)." would money change hands? What would "mr X" who wants to take over the lease have to do to in order to secure that lease handover for himself? Surely pay a premium to have that lease re-assigned to his name..?

PLEASE, IF YOU ARE GROWING WEARY OF MY QUESTIONS, PLEASE FEEL FREE TO LET SOMEONE ELSE ANSWER

 

[fisicx]

How long is your lease? Suppose the lease was for 10 years and you have been in the property for 5 years. When the lease is reassigned the new tenant will only need to pay for the remaining period (5 years). In your case they may only need to pay £30,000 (half the amount for half the period of lease). You own nothing. All you have is a right to use the property. This right has cost you £60K. If you stayed in the property until it expired you wouldn't get a penny back.

Read the lease and the contract - it will all be detailed in there.

You really need to speak to a solicitor about this. If you current legal advisor can't explain the details give them the sack and find one who can.

 

[Leira]

Hi Fisicx, Thanks for your input. That's very interesting/ So when people buy a lease, how is that an investment for them if the lease just runs out and returns to the landlord's possesion!? Sounds similar to leasing residental (as Clinton explained earlier)

I can say that the lease in this case was for 15 years and they have had it for 1 year so far (or it might be technically 2 as it might have been September 2014 when they signed and took over the lease from a failed mexican restaurant that was occupying there before)

two questions:
~ When you look online at a commercial property for sale and there's, say, a cafe for sale at £45,000, what would the person be actually buying then? The rights to use the property for the length of the lease i guess, plus a premium? And the privaledge of being located there and making money for the business that they'll run inside it, i guess.
~ I also wanted to know if a lease can go up in value in relation to demand / general price rises, as the area is really a winner.? Would someone pay a high premium just to be in that superb popular and affulent spot?

We do have a good solicitor and also a lawyer but i'm kind of too embarrassed to ask these 'dumb' questions. I did ask a few at first but never really got a clear answer because they assumed i knew enough already to understand their explanations.

 

[Chris Ashdown]

I imagine what you have is
A lease for 15 years at a cost of £xxxx per month and maybe a few months deposit and building insurance brought by landlord but charged to you and his solicitors charges

The purchase of the fixtures and fittings inside the restaurant including the range etc which is probably the £60,000 including any Goodwill

If you cease trading normally you are responsible for the rest of the lease monthly payments

You may be able with the landlords permission to get someone to take over the lease and run their own business there, and you can sell them the fixtures and fittings if they want them. They may not value them the same as you, and you are in the spot in that what can you do with the kitchen equipment's and front of house if they don't want them so may well have to virtually give them away

If they go bust then the landlord comes back to you the original leaser for any outstanding money until the end of the lease

It's virtually impossible these days to take a lease without signing a personnel guarantee, you may be lucky, but no sensible landlord gives a long lease without some guarantee they will get there money if it all goes wrong. It may well be a separate document to the lease

 

[obscure]

....So when people buy a lease, how is that an investment for them if the lease just runs out and returns to the landlord's possesion!?

It isn't an investment, it's a cost. They have to have a place to run their business so they pay rent or buy a lease from the property owner. All they are paying for is the right to use the property for a period of time. When that time expires they have to pay again or move out. Just like paying to park your car for an hour in the council car park. When the hour is up you don't get to keep/sell the parking space.

 

[Clinton]

~ When you look online at a commercial property for sale and there's, say, a cafe for sale at £45,000, what would the person be actually buying then?

Cafe for sale at £45,000 is meaningless unless you know what they mean by cafe.

It could be the freehold of the property complete with the business.
Or just the business, no freehold and no lease
Or the business lease and business.
Or neither lease nor business but just the assets for the business i.e. chairs, tables etc.

Freeholder: Person who owns the property
Leaseholder: Person who rents the property. (As a leaseholder, that's all that you are - a renter!)
Business Owner: Person who owns the rights to profits of the business
Manager: Person who runs the business.

One person can fill all roles or you could have four different people (or businesses!) filling each role or a combination of roles.The freeholder, leaseholder and business owner can all sell what they own themselves - IF it has any value - but can't sell what the others own.

That's it. It's not complicated.

 

[myfairworld]

So when people buy a lease, how is that an investment for them if the lease just runs out and returns to the landlord's possesion!?

It isn't an investment. It is simply one of the many costs of running a business. When you decide to open a business, or to move an existing business to new premises, you are calculating that the total amount you are able to make from running that business will cover ALL the costs of running that business (including all the costs associated with the lease) plus enough for you to live on or hopefully more than enough for you to live on. It is a calculation that many small business owners get wrong and it is a calculation which can also fall apart in situations such as you describe when business partners discover that they cannot work effectively together.

Just picking up on your comments about the 'value' of any business. The fact that a business gets good reviews - or got good reviews at one stage - doesn't make it a profitable business. The slightly grotty looking greasy spoon down the road that no newspaper would even think of reviewing may actually be making a profit while the well reviewed restaurant is not. Reviews are only really valuable for the immediate extra surge in business which they hopefully bring and if the punters are delighted with the food and the service and the ambience they may in turn tell enough of their friends to bring in even more trade. But the fact that a restaurant had a good review a few months back is pretty much irrelevant, few people read 'old' reviews, and most people who enjoy restaurant meals are resigned to the fact that restaurants can quickly go downhill. Over the years I've eaten in any number of restaurants which were great for the first few weeks or months but then started to fade. It takes so much energy and commitment plus things like knowing how to motivate and get on with staff to keep any business up to the mark and particularly a restaurant.

 

[Chris Ashdown]

If you were asked to let someone use your spare room for say 6 months you would charge them a monthly rent after 6 months when they left it goes back to you to use as you wish that is a lease in other words

The rest of the money was most likely for fittings and goodwill

 

[Chris Ashdown]

dont forget its for a fixed period, so i you start a business and it goes well at the end of the lease you may have to leave or move if the landlord does not want to give you a new lease,

There may well be rent reviews during the lease

 

[Root 66 Woodshop]

With all due respect to people's replies - Leira you really need to get your partner to speak to a solicitor - everyone here is only replying to your "one sided story" - for all these chaps know there's more dirty laundry involved, plus there's always the issue that if you take all the information from here and your partner goes ahead and "does something" he could really be in the crapper... as you've said yourself you're not involved in the situation - for all you know there maybe something that you don't know about.

Seriously, get a Solicitor involved - look at the contract - work something out between the two business partners on a mutual level rather than looking to find ways to get out of it.

 

[deniser]

There is a little bit of misinformation on this thread - but also some very valid points.

What no-one seems to have touched upon (apart from Chris Ashdown) is that the business is, from the sound of it, owned and operated as a partnership between the Op's husband and the other chap. This could of course be completely wrong and a different entity could be operating the business but this is the first point that needs clarifying.

So your starting point in all of this is the Partnership Agreement which should have been signed when the business started. If you had a solicitor acting for you on the purchase, then it is likely you will have entered into such a document. So if there is a Partnership agreement, this should deal with your scenario and tell you exactly what you can do if one partner is not pulling his weight or one partner wishes to sell up.

In the absence of a formal partnership agreement, you will need to look at the Partnership Act 1890 which comes into effect automatically when two or more people are carrying on a business with a view to making a profit - unless supserseded by a written document.

I know nothing about partnership law except that one partner can give notice to terminate the partnership but I don't know what happens to the assets and liabilities of the partnership or lease but you will need to look into this further as to whether the other partner can be forced to assign the lease. Your solicitor should be able to advise.

On the question of the lease itself and whether it has any value, did you pay the £60K premium to the previous tenant (on an assignment) or to the Landlord? I am assuming you paid it to the previous tenant in which case what was it for? Your purchase contract should itemise what the premium is for ie. fixtures and fittings, equipment, goodwill, because the rent isn't a full market rent etc. If you paid it to the Landlord, what was it for?

Commercial premises are usually let at an annual rent which is usually paid quarterly. There is not usually any premium to pay unless the premises have some extra value which is not reflected in the rent. So whether your lease has value depends on the following factors:
1. you are leaving behind valuable fixtures and fittings which are of use to an incoming tenant
2. the open market rent for the premises is less than what you are currently paying. This could be for a number of reasons including:
a, you have carried out extensive works which has increased the premises' value
b, the landlord agreed a good deal on the rent making it cheaper than comparable properties
c, the open market rents in the area have risen since your rent was agreed and your next rent review is still some way off.
d, the property is sought after because of a shortage in the area
e, the property is of special value to the incoming tenant - for various reasons - eg. he owns the property next door and wants to knock through or he needs those particular premises for whatever reason.
All of these can affect the value of the property and contribute to the amount of the premium.

Conversely, the actual rent might be higher than the open market rent of the property and this is where reverse premiums might come into play. This is where the Landlord or the outgoing tenant pay the incoming tenant a premium to take the costly rent/premises off their hands whilst maintaining the headline rent so as not to depress rental values in the area).

So the lease may or may not have a value, dependent on many factors which vary constantly. The fact that you paid £60,000 when you took the lease is not relevant at all.

The fact that the business at the premises is failing affects the price that you can sell the business at - in this case probably zero if there is no goodwill. But the value of the lease is separate and it is possible that the lease has value even if the business is not making money.

Premiums can even be paid when the property is completely vacant because the business carried on there doesn't really affect it. The valuation of the business and the valuation of the lease are completely separate.

An straightforward example of a lease premium is let's say, if the yearly rent is £120K pa. The lease was taken out 2 years ago. In those two years, rents of comparable properties increased to £130Kpa. It is another 3 years until the next rent review. An incoming tenant would be saving £30K over the next 3 years so that might make the premium for the lease £30K. Everything is negotiable though.

The problem that you have now is that your husband will be liable for the rent and other payments under the lease and on the property (eg. business rates) until the lease term ends. So if he is no longer participating in the business, it is essential that he extricates himself as soon as possible.


Hope this helps.

 

[Leira]

Hi Everyone, it's the original poster here. I just wanted to say thanks for everyone's advice. In the end there was a sale, with a premium of £270,000 which was split equally between the 2 partners. Good luck to everyone else in a similar position. Thanks!