By: Marshall Pollack, Certified Business Broker (CBB), Certified Business intermediary (CBI) and M&A Master Intermediary (M&AMI) and Co-Owner of Transworld Business Advisors San Diego North,

Many businesses in San Diego operate under a commercial lease, which may include office space, a warehouse, a manufacturing plant, retail space, and more. Therefore, it’s important to address the issue of selling your business when a lease is involved.

Specific to San Diego, commercial lease regulations include provisions for lease duration, rent increases, lease termination, and translation requirements for non-English languages. The business lease will state that it is in force for a certain amount of time. Very likely, there is also what is called a “holdover clause” which sets in when the lease expires but the business still occupies the leased premises.

Consequently, when selling your business in California, it’s important to understand local regulations and lease agreements to ensure a smooth transition. So, in this article, here’s what you will learn:

• Understanding your commercial lease agreement, its terms and conditions and the various options to facilitate your business sale.
• Selecting and negotiating the best options for the transfer of your commercial lease to avoid pitfalls and unnecessary costs.
• How to navigate San Diego's commercial leasing regulations and stay in compliance.
• How to conduct due diligence and instill confidence in the buyer and thereby expedite the sale process.
• What lease-related concerns you can expect from buyers and how to deal with these.
• How to acquire expert help with lease negotiations to facilitate a successful transaction.

Understanding Your Commercial Lease Agreement

First things first, when considering selling your business in California, it’s important to thoroughly review your lease agreement.

For example, the agreement will include clauses related to assignment, subletting, and landlord consent. These factors are critical because they can impact the sale of your business. The length of the lease, the stipulations of ownership change, landlord approval procedures as well as renewal clauses are essential to take into consideration when selling your business.

Key Lease Clauses Affecting Business Sales

There are several key lease clauses that can influence the sale of your business. The most important of these clauses include the following.

• Assignment Clause: This clause dictates whether you can transfer the lease to a new owner (the buyer) and whether the landlord's consent is required for the assignment. Some leases may prohibit assignment altogether, so it's important to review the clause carefully. 
• Lease Duration and Renewal Terms: These cover how much time is left on the lease and whether the lease includes renewal options. 
• Permissions and Restrictions: Your lease may cover restrictions on the types of business activities, as well as restructuring or modifying the leased property itself. An important part of these clauses includes the scope of the landlord’s and your liabilities and obligations.
• Subletting and Assignment Clause: This clause outlines the rules for subletting and/or assigning the lease to another party. 

A standard business lease will have many more clauses including payment information, costs, and what happens in case of default. Understanding these clauses and knowing how to proceed will make a real difference in executing the transfer of your lease to the new owner.

The Importance of Lease Term and Renewal Options

The length of the remaining lease term and available renewal options can affect the attractiveness of a business to potential buyers. The key to this process is to start early. If you’re considering selling within a certain time frame, ensure that you get the maximum amount of renewal options with the right to transfer or reassign the lease to your successor.

Starting early is particularly important for large commercial landlords and property management companies. They may need time to review and process your lease assignment and transfer options. This will also give you the time to secure favorable lease options before initiating the sale process.

Options for Handling a Commercial Lease in a Business Sale

Typically, San Diego business owners have several options available to them when dealing with a commercial lease during a business sale. Each option has its own advantages and potential challenges, and the best choice often depends on the lease terms, the landlord’s preferences, and the buyer’s needs.

Understanding these options will help you make informed decisions that protect both your interests and those of the buyer.

Option 1: Transfer the Lease

Transferring the lease is often the most straightforward and desirable option.  Most commercial leases stipulate that the landlord may not unreasonably withhold their consent to the lease being transferred to another commercial entity. In most cases, the landlord retains their right to withhold consent if the transfer results in an entirely different use of the premises.

The best practice is to discuss transfer requirements with the landlord well before putting the business on the market. This will give you time to negotiate any differences and will facilitate a smooth transfer to maintain business continuity which is attractive to buyers.

Option 2: Negotiate a Long-Term Lease Extension

In many cases, extending your lease before selling the business can add significant value and reduce buyer risk, especially in a stock sale. Securing a long-term extension before the transition takes place avoids sudden rent increases and instills confidence in the buyer.

Negotiating the longest possible lease term will benefit the buyer who will appreciate the stability and predictability of a long-term lease, thus making the business more appealing.

Option 3: Sublet the Space to the Buyer

When a lease does not allow a transfer or assignment, you could consider subletting the space to the buyer. This is not ideal as the owner is still legally responsible for the lease, but it still allows the buyer to occupy the space. This also means that the original lease terms typically remain intact, avoiding sudden rent increases or changes to the agreement.

When the option of subletting is chosen, it’s important to draft a solid sublease agreement to protect both parties’ interests and ensure the landlord is aware and agreeable.

Option 4: Negotiate a New Lease for the Buyer

Depending on your circumstances, it may be possible to negotiate a completely new lease between the new buyer and the landlord. While this option will require more effort, it can result in terms that better suit the buyer’s business model or future plans.

Negotiating a new lease for the buyer can also be beneficial if the current lease terms are outdated or unfavorable, but it can open the door to potential rent increases or stricter conditions. In either case, it’s crucial to involve both legal and brokerage professionals to ensure the new lease is favorable and enforceable.

Navigating San Diego's Commercial Leasing Regulations

Effective January 1, 2025, California Senate Bill 1103 sets new rules for commercial leases with “qualified commercial tenants,” such as small businesses or non-profit corporations.

While this new law affects only a fraction of California commercial leases, it imposes significant obligations on landlords who have commercial leases with qualified commercial tenants. This includes extended notice periods for rent increases and terminations, translation requirements for certain leases, and restrictions on passing through operating costs.

Additionally, there are local laws and regulations in San Diego that pertain to commercial leases in general. It’s important for California businesses with commercial leases to familiarize themselves with the city-specific ordinances to avoid legal complications during the sale and stay in compliance. To avoid any surprises at all, it will be beneficial to consult a California business broker to guide you through this process.

Zoning Laws and Permitted Use

California’s general zoning laws and permitted use of land and buildings are important aspects of selling your business. While zoning regulations include such things as agricultural, residential, commercial, and industrial uses, they are further subdivided into many different permissions, ranging from vets, body shops, and chemical plants to the number of fast-food restaurants in residential areas.

In other words, your current zoning may fit your business, but may not be appropriate for what a buyer will do with the property.

San Diego's zoning laws can impact the permissible uses of a commercial property. It’s important to ensure that your business's operations align with these zoning regulations to prevent potential issues for the new owner.

Transfer Taxes and Fees

As in any business transaction, there are taxes and fees involved. California tax law is not simple, and the requirements to pay taxes and fees when selling or buying a business with a commercial lease may vary depending on the specific transaction. There may also be local taxes or fees associated with transferring a commercial lease in San Diego.

In other words, there are no sure-fire answers on how much either buyer or seller will have to pay in transfer taxes and fees. Ultimately, it is important to consult an expert and get the specifics so you can factor those into the sale negotiations.

---

Contact Transworld Business Advisors of San Diego North for expert advice on selling your business with a commercial lease.  Our commercial real estate team and partner legal professionals can help you navigate the complexities of your business sale. Call 760-607-0641 or contact us online.

---

Preparing for Due Diligence

When selling your business, especially when a commercial lease is involved, it’s crucial to perform due diligence. Meaning, get all your documentation together. This includes organizing all lease-related documents and being prepared to address buyer inquiries during the due diligence phase.

In the negotiation and sales process, it will be necessary to present detailed financial information such as details of rent, maintenance fees, taxes, and any other financial obligations associated with the lease. Specifically, any restrictions or permissions relevant to the lease should be made available.

Transparency and thorough preparation will instill confidence in the buyer and thereby expedite the sale process.

Common Lease-Related Concerns from Buyers

Negotiation may reveal typical questions and concerns buyers will have regarding existing leases, such as rent escalation clauses or maintenance responsibilities. Following are some  examples of questions that buyers may have:

• Transferability of the Lease: Buyers want to know if the lease can be legally transferred to their name without major complications or additional negotiations with the landlord.
• Remaining Lease Term: Buyers may be concerned about how much time is left on the current lease and whether they will need to renegotiate or renew it shortly after purchase.
• Rent Escalation Clauses: Many buyers worry about unexpected rent increases that may be built into the lease, which could affect profitability.
• Maintenance and Repair Obligations: Buyers want clarity on who is responsible for maintaining and repairing the property—whether it's the landlord or the tenant.
• Personal Guarantees and Liability: Buyers are often apprehensive about whether they will have to personally guarantee the lease or take on any liabilities from the previous owner.

Role of Professional Business Brokers

In the often-complicated process of negotiating commercial leases and sales agreements, it’s highly beneficial to have professional business brokers by your side who are experienced in San Diego's commercial real estate market. We know how to navigate the complexities of lease assignments and will ensure compliance with all local regulations.

In other words, consulting a professional business broker not only will take a significant load off your shoulders, but it will also save you time and effort while being certain that the best choices will be made.

How Transworld San Diego North Can Help Sell a Leasehold Business

In summary, navigating the complexities of selling a business with a commercial lease will involve a thorough understanding of your lease agreement, effective negotiation with your landlord or leaseholder, and familiarity with all legal and financial aspects.

Transworld San Diego North can assist you as a knowledgeable partner in handling the intricacies of selling a business with a commercial lease. Transworld offers significant expertise in managing such transactions and ensuring compliance with San Diego's unique regulatory environment. Our commercial real estate division consists of experts in buying and selling commercial properties, including any legal aspects such as commercial leases. Their guidance will enable you to navigate this complex process successfully.

You can count on Transworld to ensure you receive the maximum value for your business. We handle all of the complexities of the sale, simplifying the process and keeping it fully confidential for all clients. Not to mention, we bring a team of true professionals to close the deal, including CPAs, attorneys, and financial advisors. We invite you to reach out to Transworld Business Advisors of San Diego North for a free consultation to determine your business’s market value.

Transworld Business Advisors of San Diego is part of the global Transworld Business Advisors network, the world’s leading business brokerage firm. Learn more about our worldwide reach and expertise at Transworld Business Advisors.

Suggested next reading:

• How Long Does it Take to Sell a Business in San Diego?
• How Much Will a Business Valuation Cost? 
• Selling a Landscaping Business in San Diego
• How to Sell a Manufacturing Business in San Diego: An Expert Guide
• How to Sell a Plumbing Business in San Diego: A Step-By-Step Guide

 

FAQ

What happens to a lease when a business is sold?

Depending on the structure of the lease and its terms and conditions, the lease either transfers to the new owner of the business, or the lease is renegotiated with terms acceptable to the new owner and leaseholder. After having successfully transferred the lease to the new owner, the previous owner is no longer responsible for the lease.

How do I transfer a commercial lease to a new owner?

Simply stated, you will have to negotiate with your landlord or leaseholder on the terms of transfer which include length of lease time, occupation, and payment requirements. If your lease allows for transfer and all parties agree to its terms and conditions, it will be a straightforward process for the new owner to sign the lease.