Asset acquisition and disposal is a term that can be used to describe the purchase or sale by one commercial enterprise – from or to another – of certain assets used in the operation of a business.  The transaction can relate to the acquisition or disposal of an operational business as a going concern, or it can describe the sale and purchase of assets only, from one party to another.  One of those assets will likely be the lease of a commercial property, from which the business is operated.  The lease is a separate contractual agreement between the landlord and the seller of the business and detailed, separate steps are necessary to ensure that the lease is (and, indeed, can be) assigned to the purchaser, by the seller, on completion.

Types of Commercial Business Sales

There are generally two types of commercial business transaction – one is the sale and purchase of the assets of a business, taking place between seller and purchaser.  The other is the acquisition or disposal of the entire issued share capital in a limited company or partnership.  In the latter circumstance, any lease will usually be granted to the limited company or partnership, which itself is a legal entity – able to own and hold property.  The lease would therefore vest with the company or partnership and would not need to be separately assigned.  It is the former case, where there is a change in the legal owner of the assets themselves – one of which is the lease – that would require the standalone assignment of the lease from the seller (the assignor) to the purchaser (the assignee), with the permission of the landlord and subject to any requirements the landlord is permitted to put in place under that lease.

A Share Sale

Commonly, the acquisition of the entire issued share capital in a limited company or partnership by a third-party buyer will see the beneficial ownership of that commercial entity change hands.  The shareholders or partners, as the case may be, will change and the entitlements to profits – the shares – will move into the ownership of the purchaser.  The legal entity itself, however, in which those entitlements are vested shall remain in existence.  As a limited company or a partnership is capable of owning and holding property, no action will necessarily be required to transfer the lease.  That being said, it is still crucial that a purchaser has a clear understanding of the terms and conditions of the lease in place, as it will be incumbent on the company or partnership (and therefore within the legal remit of the onward directors or partners to ensure) to adhere to those covenants.  Just because the lease might not need to be assigned, it does not mean that a purchaser is absolved of the importance of reviewing, accepting and observing the legal requirements within.

An Asset Sale

With an asset sale, the need for the purchaser to consider and fully understand the terms and conditions of the lease is no less important.  However, there are additional matters to consider.  The lease between the landlord – the freehold owner of the property from which the business is operated – and the seller of the business is a private, separate legal agreement, which the seller will not have the automatic ability to sell and assign.  Leases will often contain what is known as an alienation provision, which outlines the conditions and requirements that must be met in order for the landlord’s permission to be given to the assignor seller to transfer the lease to a new assignee purchaser.  Common examples of the sorts of conditions one might expect to see are the landlord’s ability to require a rent deposit from the incoming tenant (in addition to personal director guarantees, if the proposed assignee is a limited company) and insisting that the outgoing assignor enters into a separate authorised guarantee agreement – essentially a separate, legally-enforceable guarantee that the assignee will observe and perform the terms and conditions of the lease moving forward.

Key Things to Consider With An Asset Sale

There are different considerations, dependent on a client’s particular role with an asset transaction.  Aside from the various requirements relating to the transfer of the wider assets themselves, any lease will attract additional due diligence.  We contemplate some of the wider general considerations of an asset-led transaction by clicking here. With regards a lease, the seller of assets might find themselves in a position whereby they are expected to give an authorised guarantee agreement to the landlord, in respect of the purchaser’s obligations under the lease.  A seller will often be looking for a “clean exit” from a transaction.  They may not wish to have the liability of potentially indemnifying their purchaser’s failings hanging over them, should the purchaser breach the covenants under the lease post-completion and the landlord then pursues the seller directly.  It may be possible to seek from the purchaser a cross-indemnity – an agreement within the contract that if the purchaser breaches the lease which results in a landlord seeking to pursue the seller, that the seller can then pursue the purchaser themselves.  This itself, however, requires the seller’s satisfaction that the purchaser is solvent and would be able to fulfil that indemnity, if required.

A buyer may find themselves in a position whereby a rent deposit of three or six months is needed, in addition to commencement of payment of rent on the completion of the assignment.  This requirement could have a significant impact on short-term cashflow and consideration will be needed when calculating the overall cost of the wider asset transaction.  Where a limited company or limited liability partnership is the proposed purchase vehicle, the landlord might insist upon an individual director or partner guarantor, in the event that the company or partnership gets into difficulty with regards to solvency.  If the lease permits this, an individual guarantor should consider seeking independent financial advice as to how (if at all) they can ring-fence their personal assets from the scope of the transaction.

Property Procedural Matters

Irrespective of which particular role a client is leading within an asset-led transaction involving a leasehold interest it is of key importance to understand what is required from a property perspective.  Neither party will wish to see a situation where the sale and purchase of the assets legally completes, but the assignment of the lease transpires to be defective.  This would result in a purchaser acquiring assets for a business for which it has no property from which to operate and a seller retaining legal responsibility for a property which it no longer needs.  The starting point in ensuring a parity of protection for all parties rests in establishing exactly what is required for the successful assignment of the lease and what the landlord is entitled to require.  The wider transaction should be made conditional on the successful procurement of the landlord’s consent to assign and all parties must (and will) be clearly advised as to their respective obligations and liabilities under the lease – particularly the assignment provisions.

Commercial Property Solicitors in Sheffield & Barnsley

Our commercial property specialists across Sheffield and Barnsley have wide and established experience in acting for both purchasers and vendors in respect of asset-led business transactions, particularly those with a leasehold involvement.  Our lawyers will offer you concise but detailed legal advice tailored to your particular situation, based on a key understanding of you, as a client, and the business that you operate.  Please contact us today to provide your initial details and one of our commercial property specialists will be able to respond, take further information and provide a bespoke quote.

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** NOTE:  This article is for guidance only and is not to be construed as or relied upon as legal advice.  If you require legal advice tailored to your situation, please contact us to arrange an initial face-to-face or telephone appointment and one of our solicitors will contact you to take more details.