Buying a Leasehold Business: What to Check in the Lease

Most small businesses for sale in the UK are leasehold: the business rents its premises from a landlord, and you would take over that lease (or be granted a new one) when you buy. The lease is often worth as much attention as the business itself. A good business on a bad lease can be a poor purchase, because the landlord's terms control your costs and how long you can stay.

Assignment or a new lease

The usual route is for the current lease to be assigned to you, which nearly always needs the landlord's consent. Landlords commonly ask for references, accounts or a business plan, a rent deposit, and sometimes a personal guarantee. Consent can take weeks, so start early. Ask the agent whether the landlord has been told about the sale.

Sometimes the landlord will grant a new lease instead, which is a chance to negotiate better terms. Either way, the seller may have to guarantee your obligations for a period after the assignment (an authorised guarantee agreement), which is normal.

The terms to check

• Term left. How many years remain? Lenders often want the lease to run well beyond the loan term, and a short lease makes the business harder to sell later.
• Rent and rent reviews. What is the rent, when is the next review, and how is it set (open market, upward-only, linked to inflation)? A review shortly after you buy could change the figures.
• Repairs. A full repairing lease makes you responsible for the building, possibly including the roof and structure. Check the condition now, and whether a schedule of condition limits what you must put right.
• Service charges and insurance paid to the landlord, and how they have changed.
• Permitted use. Does the lease allow what you plan to do, including any changes to the business?
• Alterations. What can you change without consent?
• Break clauses: who can end the lease early, when and how.
• Dilapidations. At the end of the lease you may have to put the premises back into repair. Ask whether any claim is expected.

Security of tenure

Many business leases in England and Wales give the tenant a right to renew at the end of the term under the Landlord and Tenant Act 1954. Some leases are "contracted out" of that protection, which means the landlord can refuse a new lease when the term ends. Your solicitor should tell you which applies; it makes a real difference to what the business is worth when the lease is running down.

Premium and goodwill

In a leasehold sale the price is mainly for the goodwill (the business's earnings and reputation), plus fixtures, fittings and equipment. Occasionally a lease with unusually favourable terms or a scarce location carries a premium of its own. Be clear what you are paying for.

Questions to ask before you offer

• Has the landlord been approached about the sale, and what will they want from a new tenant?
• Are there any disputes with the landlord, arrears, or outstanding repair notices?
• Has the rent changed recently, and when is the next review?
• Is the lease inside or outside the 1954 Act?

Have a solicitor read the full lease and any licences or variations before exchange. The listing summary is a starting point, not a substitute.