Issues relating to property lease is a common reason for delays in mergers and acquisitions transaction. In this episode, we hope to help parties in a business sale avoid these leasing issues and ultimately save more time, money and energy in the process.
- Property leasing issues can delay M&A transactions
- What parties can do to avoid these leasing issues
- Role of advisors in getting the transaction through quickly
- Important considerations from the vendor’s perspective
Joanna: Hi it’s Joanna Oakey here and welcome back to the Deal Room podcast, a podcast brought to you by our commercial legal practice – Aspect Legal.
Now today we have the fabulous Liz Lee back again and we’re talking about leasing in the context of business sale and purchase transactions and the leasing timelines and issues to be aware of so Liz welcome back!
Liz: Thanks for having me back Joanna!
Property leasing issues can delay M&A transactions
Joanna: Great. Well look let’s start off with why we’re talking about this. Why are we talking about leasing and the leasing timeline?
Liz: We’re talking about leasing timeline. We’re talking about property leasing here.
Joanna: Good point. Yes, good thing to add there. Sorry. You’re absolutely right. At this point, we’re just talking about property leasing. But maybe we’ll talk about equipment leasing and other types of leasing in future episodes.
Liz: Yeah, absolutely. In the context of property leasing, it is important because it’s the one thing that can hold up settlement of a transaction and is not often thought about until the parties have signed the contract usually.
Well, it’s a bit of a chicken and egg thing because you know the vendor would be hesitant to approach the landlord for consent until he knows that he has the deal and therefore there is a delay right there.
Secondly, where the parties are keen to complete the deal between signing and completion and they want it to be a short space of time that’s when timing becomes critical because landlords are just notoriously known to move very slowly.
Joanna: Drag their feet. Yes yes yes absolutely.
I think that you’ve really touched on some big issues that we see repeat time and time again. Transactions come in, all the parties want to get done quickly, but no one has engaged with the landlord. Once you get that process, suddenly the buyer and the vendor feel secure about a deal so the vendor then engages with the landlord.
At that point, as you say, we’re at the mercy sometimes of the landlords process or the landlord solicitors process so I think the first element to consider here is to really be mindful of time frame when you’re thinking about the point in time when you’re going to engage with the landlord.
Liz: Yes, correct.
What parties can do to avoid these leasing issues
Joanna: Let’s talk about what can be done to avoid the issues and move things along as quickly as possible. Let’s just talk about some approaches that can assist with this process.
Number one I guess is clear. We’ve said before it’s engaging with a landlord early. But I think the second element is probably in relation to both of the parties being ready to fulfil the requirements of the landlord and that requires an understanding of what the landlord may require. How do we get across that Liz?
Liz: Well, I think that as a buyer the first thing you do is look at the property lease, right? You’ve got to look at the detail of, because these documents are often 50 pages long, 20 to 50 pages long and they are long term contracts. They could be for up to 10 years even. They’ve got to think about do they want to stay there and if they do, is tenure that’s left on to be adequate.
They’ve got to think about all these considerations first as to adequacy of premises. Then they’ve got to look at the process that’s involved to get landlord consent or change in control of the company if they’re buying the company and consider when they ask for consent, do they want changes to the lease to make it more favorable to them. Are there any commercial elements in the lease that they’re not happy with? They need to be prepared upfront for that.
My recommendation for purchasers is to make sure that they’ve gone through the lease and they’re happy with it and that they know upfront what changes they want to make. Because once they know that, then they can make it a condition precedent in the transaction document with the vendor and until they get that, they don’t have to settle.
But if they want to go on a really tight timeframe then yes armed with the information they’ve got to then jointly approach the landlord and ask the landlord to process it quickly basically, process the consent quickly. But at the end of the day, they’re at the mercy of the landlord.
Joanna: I think part of the answer to how to deal with this situation as well as you say is being prepared, being ready. It’s also about having any of the information that the landlord might require in order to assess suitability of the buyer as the new tenant in the arrangement.
Landlords generally want to feel comfortable about the adequacy of a buyer coming in, and so if you’ve got all of that information ready to go and you’ve got a good story about the adequacy and the backing of the buyer coming in I think that can really help.
Liz: Yes, and also the one thing I forgot to mention was that security that the landlord might need. That’s something that you need to keep your eye on as a buyer as to whether you can satisfy it or if you want that changed.
Joanna: Yeah, and I think part of this is putting yourself in the landlord’s shoes, understanding some of these considerations. What are the concerns of a landlord going to be and being able to meet them before they’re requested really.
Role of advisors in getting the transaction through quickly
Joanna: I think part of the approach with this area, like many areas of business sales and acquisitions transactions, is about being able to bring the other parties quickly along with you. Because we certainly see many matters that we deal with where the solicitors on the other side may be a little bit slow at responding, where the landlord’s solicitors may be a bit slow in responding.
Our approach to that Liz is to really be at the forefront and to lead communication and to be a thorn in their side if they’re not moving along with us, really to move the parties along as quickly as possible isn’t it. I think that’s an important thing to mention because if there’s not effort and attention put into elements of a transaction like this, then transactions will almost always be held up at some point. It’s not something that you can slowly plod along on. It’s something that really needs someone there pushing the transaction along with all parties.
Liz: Yes, that’s right. I mean like if there is delay in timeframes, that can often add to the cost of the transactions so I think that much is to be said to be prepared upfront.
Joanna: Yes, exactly. To make an easier, smoother and cheaper deal, which is important.
I think even just the mere education of our clients that you as advisors are dealing with can be something that can really assist in this process. If clients are aware that this is where there might be a little bit of a road bump or a slow down in the process, then they are aware of it and they can build that into their own timeline.
I think there’s a role here for advisors and certainly this is something that we work through with our clients. But advisors as a whole, there’s a role in helping our clients to understand what might cause road bumps along the way and what we can do to try and smooth the path to these transactions to get it through it as quickly as possible.
Important considerations from the vendor’s perspective
Joanna: All right. And I guess finally let’s wrap this up by talking about some issues that we’ve seen. I mean obviously one of the issues that we see as we’ve said again and again and again is late engagement of the landlords slowing a process down. We believe that it’s really important to be proactive in the engagement of the landlord and the landlord solicitors.
But I guess stepping back one step it’s important I think for the vendor to be aware of the lease terms and the process itself Liz, don’t you think?
Liz: Yes, that’s right. Because from the vendors perspective, if they have a lease, they really should make sure that the lease is in place. Essentially, it’s a legally binding document.
Joanna: And that seems obvious, right? But we’ve certainly seen issues where that has been a problem.
Liz: Yes, that’s right, where it’s turned out that the lease isn’t registered or the lease actually hasn’t been signed by the landlord. In a transaction where premises are critical to the business, if you don’t have an enforceable lease, as a seller you put yourself in a very vulnerable position.
Joanna: Yeah, and the other thing that we’ve seen which is an unusual one but we’ve actually seen it more than once is leases being held by different entities that then create issues in the transfer process so a different entity to the vendor entity selling the business. That’s I think another important thing to have your mind on as a vendor, ensuring that someone has looked at the lease and the registrations and considered all of these issues before you even put the business on the market.
Liz: Yep, absolutely.
Joanna: Great. Okay. All right. Well that has been a quick overview of the leasing timeline and leasing items to be aware of. Hopefully that’s been somewhat useful to you our listener and thanks Liz. Thanks for coming in and chatting on the show.
Liz: Thanks for having me, Joanna! Speak to you again!
Joanna: That ends our quick overview on the leasing timeline and the considerations you ought to bear in mind in the context of a business sale. I hope that through this discussion we can help you avoid some of the issues we have highlighted and ultimately save more time, money and energy in the process.
If you’re interested in finding out more about this topic, head over to our website at www.aspectlegal.com.au and there you can book in a free 15 minute discussion with Liz or anyone from our team of legal eagles.
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Thanks again for listening in! This has been Joanna Oakey and the Deal Room Podcast, a podcast proudly brought to you by Aspect Legal.
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