experts: real estate column Wednesday, June 22, 2011

Business Owners: Make Sure You Know What's In Your Lease

Most business owners lease the premises where they carry on business, and many commercial leases are comprehensive, detailed contracts.

By Dave Liden

Most business owners lease the premises where they carry on business, and many commercial leases are comprehensive, detailed contracts. Last month, I worked on a file where a business owner's ignorance of a certain requirement in his lease proved to be fatal to the proposed sale of the business to my client.

I was contacted by my client during the first week of March. My client told me he and the owner of a retail business in the Metro Vancouver area – I will call this owner 'Mr. Smith' – had reached agreement on the sale of the business to my client, with the sale to be effective March 31, 3011. I was informed Mr. Smith had owned and operated the business for over 30 years, and the business had been operating at its current location, a major shopping centre, for over 15 years. Mr. Smith and my client agreed the transaction would be done as a share purchase - meaning Mr. Smith would sell his business by selling his shares in his corporation to my client, as opposed to my client buying the assets of the business from the corporation - and I was instructed to prepare a share purchase agreement for signature by Mr. Smith and my client.

I began work on the share purchase agreement, and I reviewed the documents provided to me by my client. Those documents included the lease for the business. I reviewed the lease and noted it was a short, 3 page renewal of the original lease signed in 1998 between the landlord and Mr. Smith's corporation. I contacted my client right away and told him I needed to review the original lease. My client's response was to the effect that he had given me all of the legal documents he had received from Mr. Smith, and Mr. Smith had assured my client these were the only legal documents relevant to the sale of the business to my client.

I told my client the original 1998 lease is an important document, and I would need to review it before completion of the purchase on March 31st. The share purchase agreement was negotiated and finalized over the next 10 days, and it was signed by Mr. Smith and my client on March 18th. The signed share purchase agreement contained various representations by Mr. Smith, including a representation that the landlord has consented to the sale of the shares in Mr. Smith’s corporation to my client.

On March 29th, I received a copy of the original 1998 lease from the lawyers for Mr. Smith. I noted it stated clearly that the consent of the landlord was required if Mr. Smith wished to sell his shares of the corporation to someone else, such as my client. As a result, in preparing for the completion of the purchase on March 31st, I advised the lawyers for Mr. Smith that my client required a copy of the landlord’s consent to the sale of Mr. Smith’s shares to my client as a condition of the completion.

On March 31st, the lawyers for Mr. Smith contacted me and indicated Mr. Smith needed to extend the date of completion of the sale for a few days. I learned that no one had informed the landlord of the sale, and as a result, the landlord’s consent to the sale of Mr. Smith's shares was not yet available. My client was very surprised to learn this news, however, he agreed to extend the completion to April 8th.

On April 5th, the lawyers for Mr. Smith contacted me again and told me the landlord was agreeable to giving its consent to the sale of Mr. Smith's shares to my client on the condition that my client give the landlord his personal guarantee of the lease for the remaining 4 years of the lease term. My client refused to do this, and the sale of Mr. Smith's business to my client did not go ahead.

I will leave you with the following question: do you think Mr. Smith honestly did not know he needed to obtain the landlord's consent to a sale of his business by way of sale of shares in his corporation? I look forward to reading your answers, and Happy Easter!

Quote of the month:

"It is not enough to attain to a degree of precision which a person reading in good faith can understand; but it is necessary to attain if possible to a degree of precision which a person reading in bad faith cannot misunderstand." – From a decision given by a court in England in 1891




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Recent Articles by this columnist:

Protecting Your Assets From Creditors: Do Trusts Work?
Wednesday, December 21, 2011


Beware Of This Lethal Trap In Commercial Agreements
Friday, October 21, 2011


All articles by Dave Liden

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