Buying a business with a lease: getting the landlord to say yes

You’ve found the right business, agreed a price and lined up funding. Then the agreement mentions that the sale is conditional on the landlord’s consent to assignment of the lease, and suddenly a third party with no stake in your deal can delay or reshape it.

For most established New Zealand SMEs that lease their premises (workshops, clinics, hospitality venues, distribution sites, retail), the lease is close to being part of the goodwill. A good customer base in the wrong building, or on a lease that ends in eighteen months, is a different business. This guide covers how assignment works, what landlords ask for, and how the lease affects what a lender will fund.

What does assigning a lease actually mean?

When you buy a business’s assets, you buy the plant, stock, goodwill and the trading name. You don’t automatically get the right to occupy the premises. That right belongs to the vendor as tenant under their lease. To move it across, the vendor assigns the lease to you, or to your purchasing company, usually by a deed of assignment signed by the vendor, the buyer and the landlord.

After assignment you step into the vendor’s shoes for the rest of the term. That includes the rent, outgoings, rent reviews, repair obligations, insurance requirements and the make-good obligations at the end of the lease. You inherit the lease as it stands, not as you’d like it to be.

In a share sale the tenant company stays the same, so technically there’s no assignment. Many leases deal with this by treating a change in the shareholding or control of a tenant company as an assignment, which brings you back to needing consent. Read the clause before you assume a share purchase avoids it.

Can the landlord say no?

Most commercial leases say the tenant can’t assign without the landlord’s written consent. Where a lease says that, section 224 of the Property Law Act 2007 requires the landlord not to unreasonably withhold consent, and to give consent or notify the tenant in writing that it is withheld within a reasonable time.

That protection is real, but it has limits:

• A reasonable refusal is still a refusal. A landlord can generally decline a buyer who can’t show they can pay the rent, has no relevant experience, or intends to change the use of the premises.
• Absolute bans are allowed. The Act lets a lease prohibit assignment outright, and in that case the reasonableness rule doesn’t apply. It’s rare in standard commercial leases, but check.
• Conditions are common. Landlords often consent subject to conditions, such as guarantees, a bond, arrears being cleared or the lease being varied. These need to be reasonable too, but expect to negotiate.
• “Reasonable time” isn’t a fixed number of days. In practice, the speed depends on how complete your application is.

What will the landlord want from you?

Think of the consent request as a credit application to a second lender. A complete pack, sent early, is the single best way to keep the timetable on track. Expect to supply:

1. Who the tenant will be. Your purchasing entity’s details and its directors and shareholders.
2. Financial capacity. Personal statements of position for the guarantors and, where the buyer is an existing business, recent financial statements or management accounts. Our guide to management accounts lenders like works just as well for a landlord.
3. Experience. A CV or summary showing you, or your management team, can run this type of business.
4. Your plans. Confirmation the use won’t change, and details of any fit-out or alterations you intend to make (alterations usually need separate consent).
5. References. A previous landlord or a trade reference often helps.

In return, expect the landlord to ask for:

• Personal guarantees from the directors of the purchasing company.
• A bond or bank guarantee, commonly sized as a number of months’ rent plus GST and outgoings.
• Payment of their legal costs for the deed of assignment. Who bears this between vendor and buyer is a negotiating point.
• Arrears to be cleared by the vendor before or at settlement.

The bond or bank guarantee is easy to leave out of the settlement budget. It’s cash, or a facility, that you need on the day, alongside the price, the stock and your working capital.

What should you check in the lease before you go unconditional?

The lease is a due diligence document, not a formality. Business.govt.nz’s guidance on buying a business lists rent agreements among the contracts to review, and its page on leasing premises is a useful refresher on the terms that matter. For an acquisition, the ones that move the numbers are:

Two of these deserve extra attention.

Make-good. Because you take over the vendor’s obligations, you can end up responsible for removing and reinstating a fit-out you didn’t install and didn’t price. Ask for a schedule of the premises’ condition and the landlord’s position on existing alterations, in writing, before you go unconditional.

Rent reviews. If a market review falls three months after settlement, the profit you based your valuation on may not hold. Factor the likely outcome into your view of price, as covered in how to value a small business.

If you’re already working through a deal and want to understand what the whole settlement could look like, including the bond, start a 60-second enquiry and we’ll look at it with you.

How does the lease affect your acquisition loan?

A lender funding a business purchase is lending against future cash flow and whatever security is available. The lease affects both.

• Term versus loan term. If the lease, including renewals, ends before the loan is repaid, the lender is relying on a business that may have to move. Expect questions, a shorter loan term or a requirement for other security.
• Goodwill is worth less without tenure. That’s one reason many acquisitions are partly or fully secured on property. See using property as security for a business loan.
• Guarantees count as commitments. Lease guarantees you sign will be considered when a lender looks at your overall position.
• Consent is a pre-settlement condition. Lenders generally won’t release funds for a purchase until the landlord’s consent and deed of assignment are in place, so a slow landlord can push you past your finance approval or condition date.

Our page on funding to buy an established business explains the common structures. Unsecured and property-secured options range from $20k to $1m, and property-secured funding can in some cases settle within 24 hours of approval. That only helps if the landlord has signed.

How should the conditions line up?

A typical business sale agreement has several conditions: finance, due diligence, landlord consent, and sometimes accountant’s review or staff retention. The order in which they expire matters.

A sensible sequence for most buyers:

1. Read the lease first, ideally before signing the agreement, or as the first task in due diligence.
2. Send the landlord pack immediately after signing, through the vendor or their agent as the agreement requires.
3. Keep due diligence open until you know the landlord’s conditions. A demand for a large bank guarantee or a lease variation can change your view of the deal.
4. Satisfy finance last, once you know the full settlement figure, including the bond and any arrears adjustment.

If the landlord is slow, ask your lawyer about extending the condition dates before they pass, not after.

Our due diligence checklist for buying an SME covers the rest of the contract review.

A worked example

Illustrative scenario only. Not a client.

A buyer agrees to purchase an established engineering workshop in the Waikato for $700k plus stock. The vendor’s lease has two years left with one right of renewal for a further three years. The buyer plans to fund the purchase over five years.

During due diligence, three issues surface:

• The landlord’s conditions. The landlord will consent if both directors give personal guarantees and the purchasing company provides a bank guarantee equal to three months’ rent plus GST and outgoings.
• A rent review. A market rent review falls four months after settlement. Nearby industrial rents have risen, so the buyer budgets a higher rent from month five.
• Make-good. The vendor installed a mezzanine floor and three-phase power without documented landlord approval of the reinstatement terms.

The buyer’s lawyer negotiates with the landlord through the vendor. The landlord agrees in writing that the mezzanine and power can stay at the end of the lease, and the guarantees are limited to the current term and the first renewal. The vendor agrees a modest price reduction to reflect the rent review.

On the finance side, two years plus a three-year renewal matches the five-year loan only if the renewal is exercised, so the lender wants additional security. The buyer offers a registered mortgage over a rental property, which also allows the bank guarantee to be funded in the same facility. The finance condition is satisfied last, once the full figure is known.

Lease sorted, now see if the numbers work

A lease assignment is where a lot of good acquisitions slow down: the landlord wants a guarantee, the bond adds cash to settlement, and the condition dates start to crowd each other. Buyers who know the full settlement figure early (price, stock, bond, working capital) are the ones who settle on time.

That’s the conversation we have with buyers of established businesses every week. Here’s how it works with us:

• The enquiry takes about 60 seconds, and there’s no credit check when you first enquire.
• We don’t send your details to a pile of lenders. Your phone won’t start ringing with calls from people you’ve never heard of.
• A real person looks at your purchase, the lease position and the security available, then calls you to talk it through.
• Please fill the form in accurately: the purchase price, settlement date and any landlord conditions help us match the right option the first time.

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