Keeping Business Sales Confidential from the Landlord

Confidential Business Sales

Confidentiality is a critically important element for many business owners when selling their business. The vast majority of business owners do not want their employees, customers, suppliers, or competitors to know that their business is for sale. Business owners fear disruption to their business if word of the sale gets out, which is why a professional business broker advertises the business confidentially while carefully qualifying and screening all prospective buyers prior to revealing the identity of the business. The qualifying process requires every prospective buyer to complete a Non-Disclosure Agreement with accompanying financial disclosures.  But to what extent does the business sale’s confidentiality extend to the landlord who owns the commercial unit in which the business operates? Let’s explore this often overlooked issue which many business owners face when selling their business.

Landlord Has No Ownership Rights over Business

The landlord of a commercial building does not have any ownership rights in businesses which lease space from them. Instead, landlords have a right to collect rent from the business and in return grant the business owner a leasehold right via a commercial lease. The leasehold right gives the business owner the legal right to use and occupy the landlord’s commercial space for a set period of time under specific terms as outlined in the commercial lease. Some commercial leases give landlords the right to a percentage of revenue or profits from the business, but such circumstances are rare and still do not give the landlord ownership rights over the business. A landlord is essentially an interested third party of a business sale whose consent is needed for the transfer of the leasehold right to a buyer. But until such consent is needed, the business owner has every right to keep the sale confidential from their landlord.

Reasons to Keep Sale Confidential from Landlord

  • The most important reason for business owners to keep the sale of their business confidential from their landlord is to safeguard the integrity of their current lease.
  • A commercial landlord who is aware that a tenant has put the business up for sale may attempt to extricate themselves from the lease.
  • This is because some landlords fear that the business will close if it is not promptly sold thus leaving the landlord with empty premises.
  • Rather than face that possibility, a landlord may try to essentially find a replacement tenant of their own choosing.
  • This is especially common when the current tenant is in breach of their current lease in any way or if the current lease is about to expire.
  • The current tenant or business owner in such circumstance may be forced to move or close, which prevents the sale of the business.
  • Business owners with secure long term leases still have reason to fear a landlord who becomes aware that their business is for sale.
  • Landlords may try to force the current tenant to leave by imposing onerous new terms or conditions on the lease.
  • Moreover, a landlord who is aware of a possible sale may intentionally or unintentionally let news of the sale slip to employees or customers of the business.
  • Lastly, most business owners know that a landlord is less likely to help them with needed repairs or maintenance to the space once the landlord realizes the business is for sale.
  • It is always best to avoid disruption and uncertainty by not informing the landlord about the pending sale of a business until their participation is needed to transfer the lease to the buyer.
  • The transfer of the lease takes place after a deal is ‘under contract’ by virtue of a signed and agreed upon Letter of Intent or purchase agreement between the buyer and the seller.

Screen Potential Buyers

As a practical matter, it is in some circumstances necessary for prospective buyers to be pre-screened by the business broker in order to see if they will be approved by the landlord and allowed to assume the seller’s current lease. The screening process is loosely based on the landlord’s qualification requirements that they impose on tenants for that particular commercial space. It is important to note that the business broker is not the agent of the landlord, and only the landlord can negotiate with or approve new tenants. Prior to wasting the seller’s time with a buyer who does not meet the landlord’s requirements, however, it is always best for the business broker to screen potential buyers to the best extent possible.

Special Purpose Leases

Examples of a commercial lease for a retail space specifically built and used for special purposes includes miniature golf courses, car washes, and gas stations. Similarly, a retail space for a high end restaurant with a specially built-out kitchen and interior has only one purpose (a high end restaurant). The landlords for these types of unique retail businesses often have much stricter qualification requirements for potential tenants. Only buyers with sufficient experience, business skills, or financial qualifications will be allowed to assume or sign a long term commercial lease with the landlord. Otherwise, the landlord knows that the tenant is likely to default. When the business being sold is an ‘anchor tenant’  which other tenants rely on to attract retail customers, then the landlord is likely to be even more stringent in their qualification process.

Business owners should understand prior to selling their business that the landlord does not have the right to know that their business is being sold. A landlord who is aware of a possible sale may put the current lease at risk or breach the seller’s confidentiality. Potential buyers must forge a deal with the seller by putting a business ‘under contract’ and then may try to assume the seller’s lease directly with the landlord as a contingency of closing.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.