If You Sell Your Dry Cleaners And Assign The Lease
To The Buyer, What Is Your Future Lease Liability?
Operators of dry cleaners
generally lease rather than own the premises where their businesses are
situated. When the day comes that an
operator decides to sell his business, a transfer or assignment of the lease to
the buyer will be necessary. Written
leases customarily require the written consent of the lessor to an assignment
of the lease and leases generally provide that such consent shall not be unreasonably
In most instances, consent is
provided, the buyer takes over the premises, timely pays the rent, and
completes payment of the purchase price to the seller. The lessor is happy because rent is timely
received, the buyer is happy because the location produces adequate income, and
the seller is happy because the purchase price is timely and fully paid.
Sometimes it doesn't work out
that way! Perhaps you will be the seller
whose run of luck has expired. Let us
assume you wish to sell your business.
You review your lease and find only three weeks remain to the end of
your lease term. Astute fellow that you
are, you quickly negotiate a new lease with the lessor providing for an
additional five years, with two five-year options. You find a buyer, sell your dry cleaning
business and assign the lease, and proceed to enjoy life by traveling around
the United States attending various Dixieland Jazz Festivals.
As is customary, the assignment
of the lease does not release you from liability in the event your buyer fails
to pay the rent.
Six years later and one year into
the first five-year option exercised by the buyer, the lessor, whose name you
barely remember, drops you a note indicating that rent of $2,000.00 per month
hasn't been paid for the past nine months and requests the appearance of your
check on his desk for $18,000.00 in past due rent. You scratch your head, and wonder if you have
any obligation to pay this past due amount.
You call the lessor and explain
to him that the option was for the buyer's benefit and not your own, that the
buyer exercised the option and you did not, that the buyer is operating the dry
cleaners and you do not, and that the limit of your liability extends only
through the initial five-year term of the lease.
The lessor laughs, and says that
since you are the one who signed the lease containing the five-year options,
thereby binding the lessor to provide the lease extensions, you are bound to
pay the rent for any such extension imposed upon him by the buyer if he fails
to pay the rent. Who is right?
An old California case, decided
in 1920, tells us that the lessor is correct.
Your next call to the lessor will thus be respectful, ingratiating, and
probably on bended knee.
What if your lease negotiations
with the lessor were slightly different?
What if the lessor had refused to provide any options and would only
provide you with a five-year lease?
Assume you were nonetheless able to sell your dry cleaners and assign
such a lease to the buyer. Assume the
buyer held over for an additional year after the expiration of the five-year
term, and the lessor took no action to remove the buyer from the dry cleaners
under the theory that you remain liable anyway for any such holdover period.
Assume the lessor makes the same
telephone call, requesting nine months' past due rent, asserting that the buyer
would not be in a position to retain possession had you not assigned the lease
to him. You respond that you should not
be held liable for the holdover period since the act of holding over was not
undertaken by you, but rather, by the buyer.
Who is right?
This time, you win! A 1978 case in California advises that it is
improper to impose liability on the seller under such circumstances for rent
due for a period beyond the original lease, since the buyer did not have the
right to remain after the expiration of the lease term.
The moral of the story? There are long-range consequences to lease
negotiations and many traps for the unwary!
In the old west, settlers employed guides to traverse the
wilderness. These days, attorneys can
help you traverse the wilderness of fine print!
[This column is intended to provide general information only and
is not intended to provide specific legal advice; if you have a
specific question regarding the law, you should contact an
attorney of your choice. Suggestions for topics to be discussed
in this column are welcome.]
Reprinted from Fabricare
Myles M. Mattenson © 2006