Lease Assumption vs New Lease

Lease assumption: what it means and what it requires

Assuming an existing lease means stepping into the seller's shoes as the tenant, taking over all obligations and rights under the current lease agreement. The key benefit: you inherit whatever terms the seller negotiated, which may include below-market rent, favorable lease structure, or long remaining term that would be impossible to replicate today.

Most commercial leases contain a change-of-ownership or assignment clause that requires landlord consent before the lease can be assigned to a new owner. Without landlord consent, a lease assumption is either technically invalid or triggers a lease default - either outcome creates significant closing risk.

The landlord consent process for lease assignment typically involves: - Providing the landlord with financial statements and credit history for the incoming tenant (you) - Paying an assignment fee (common - typically $500 to $5,000) - Potentially agreeing to a personal guarantee from you as the new tenant - In some cases, the landlord may require a rent reset to current market rate as a condition of consent

Start the landlord consent process as soon as the LOI is signed - it is frequently the longest lead-time item in a business acquisition. Deals have collapsed because a landlord refused consent in week eight of a ten-week due diligence process.

New lease negotiation: when it is better for buyers

A new lease is preferable when: - The existing lease has unfavorable terms (above-market rent, short remaining term, restrictive use clauses) - The landlord is cooperative and willing to negotiate reasonable terms - You want to establish your own credit relationship with the landlord - The business has significant goodwill tied to the location, giving you negotiating leverage

Negotiating a new lease when a seller's favorable existing lease exists is almost always a mistake - you surrender the seller's below-market terms and reset to current market conditions. Evaluate the existing lease first before assuming a new lease is the right approach.

Key terms to negotiate in any commercial lease or lease renegotiation: - Lease term: 5–10 years with renewal options is standard for location-dependent businesses. SBA lenders typically require a lease term equal to the loan term. - Base rent: Request a rent abatement period (1–3 months free) for the transition. - Rent escalation cap: Annual increases of 3% or CPI, whichever is lower, are buyer-friendly. Uncapped escalation clauses can dramatically increase occupancy costs over a 10-year term. - Exclusivity clause: For franchise locations and certain retail categories, an exclusivity clause prevents the landlord from leasing adjacent space to a direct competitor. - Tenant improvement (TI) allowance: Landlords often provide TI for new tenants negotiating a new lease - typically $15–$60/sq ft in competitive markets. This is less available on lease assumptions. - Personal guarantee: Limit personal guarantee to the initial lease term, not the option periods. A 5-year initial term with two 5-year options should not require a 15-year personal guarantee.

What SBA lenders require regarding the lease

SBA 7(a) loans for business acquisitions with a physical location typically require that the lease term is equal to or exceeds the loan term. For a 10-year SBA loan, the lease must have at least 10 years remaining (including exercisable option periods) at close.

If the existing lease has only 3 years remaining, you will need to negotiate a lease extension as part of the acquisition - making landlord cooperation a prerequisite for the deal to close. Begin these negotiations before final loan approval, not during the last two weeks of underwriting.

SBA lenders typically require the lease to be provided as a closing condition. The lender's counsel will review the lease for: remaining term adequacy, personal guarantee scope, landlord default provisions, and any provisions that could terminate the lease before the loan is repaid.

A landlord who signs a lender's SNDA (Subordination, Non-Disturbance, and Attornment agreement) provides meaningful protection for the lender and for you - if the landlord defaults on their own mortgage, an SNDA prevents the lender's lender from terminating your lease in foreclosure. Request an SNDA from the landlord as part of the lease negotiation.

The lease is item 33 and 35 on the Business Acquisition Closing Checklist. Pair with the Seller Non-Compete Clause guide - both are negotiated simultaneously in Phase 2 of the closing process.

Frequently Asked Questions