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Buying A Business On Leased Premises: Paying For A Headache, Thinking That You Are Buying A Business

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Buying A Business On Leased Premises: Paying For A Headache, Thinking That You Are Buying A Business

30th November 2018

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Some businesses operate from more flexible spaces such as the car boot or home corner, for example a consultant, freelancer or agent of some sort. In such instances, the business premises are of no, or little, significance for those the business deals with.

On the other hand, having business premises may be integral to the operations of the business. In such instances, the area where the business it located; its structure; its design and aesthetics may play a crucial role. Think of a clothing shop at a particular shopping mall or bakery near the busy airport or bus terminal.

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Whatever the type of business, more often than not, the business owner does not own the premises on which the business operates. Most entities conduct their business on premises which are leased, and the leases which bind the lessor and lessee (commercial leases) differ in some aspects when compared to residential leases. For example, the lease will usually be longer, the obvious reason being that the business investor must have some guarantee that they can invest. Moreover, the business owner will usually be allowed to make changes to the building, with such changes including branding; adding movable extensions or portions to the building; partitioning and making other changes to the building.

Lease agreements (whether for residential or commercial purposes) usually contain clauses which restrict or prohibit the lessee (the one who is leasing) from assigning or subletting the premises, or where this is allowed, it is usually subject to the consent of the lessor (the one who leases out the premises, usually the owner). In other words, the lessee is not allowed to substitute itself with another person, or contract with another person to use the premises without the consent (usually written) of the lessor.

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Of course this makes sense because the lessor – as the owner of the leased premises – has an interest in the property, and in particular knowing that the person making use of its premises is suitable – that is to say, meets the requirements of the lessor (e.g. financially); is using the premises for what they were intended for; and is operating in line with the lease agreement.

In some rare instances, the lease agreement will provide that the lessee cannot sublet and/or assign the lease agreement without the consent of the lessor, and which consent cannot be unreasonably refused or withheld. In such an instance, the main question is whether consent is withheld reasonably or unreasonably, and this would depend on the facts of the particular case.

Whether we are dealing with a clause that totally prohibits subletting and assignment, or a clause that allows for subletting and assignment subject to consent (which cannot be unreasonably withheld), the person ‘buying’ or ‘selling’ the business still has to apply her/his/its mind to the possible legal implications before transacting.

Where a person, perhaps in good faith, sells her/his/its business to another (whom we will refer to as the buyer for the sake of convenience) without the consent and/or knowledge of the lessor, they may be breaching the lease agreement. This means that the lessor can take action, which could include terminating the lease agreement; evicting the buyer and/or suing for damages.

From the buyer’s perspective, what this means is that she/he/it has bought what appears to be a business, but cannot for legal and commercial purposes be regarded as a viable business, because they are at the risk of eviction. Of course, that is not to say that such a buyer would not have legal recourse against the seller. Even in such an instance, a robust legal approach would probably be needed.  This may prove costly and time consuming. To make matters worse, by the time the buyer pursues the seller, it could be that the seller has spent the money for which the ‘business’ was bought.

Indeed, the possibilities are endless. It is important for each lessee to know what their commercial lease agreement allows, restricts and/or prohibits. Similarly, it is important for any person buying a business to think beyond simply buying, and seeking legal advice first. In fact, it is always prudent for all parties in any transaction to be reading from the same hymn book, so to speak – assuming that the words of that hymn book are correct.

Written By Thubelihle Mpisi and Andrea Chinamasa, Legal Advisors at MPISI CORA, a Legal Advisory and Consultancy Firm specialising in Commercial Law and Governance.

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