You are currently viewing THE FOLLY OF MONTHLY LEASES

Occasionally, we come across business owners who are keen to sell their business but only have a “monthly” lease of their rental premises. We now decline to list such a business for sale because of the inevitable problem that invariably derails the sale process and much worse, ends in a situation where the seller loses their entire business. This may sound dramatic but it can and does happen. This is the scenario: the business owner has been successfully running his or her business for several years and the long term lease on the premises reaches the end of its term. Although the seller has an option to renew the lease, he declines and opts to let the lease fall into a “monthly” tenancy, whereby the seller is only committed to continue the tenancy month by month. He feels that the business may be difficult to sell, so he takes what he feels is the safe option by only having to pay rent for a maximum of one month, if he chooses to “close the door”. He lists the business for sale, a buyer comes along who is keen to buy and finds that there is no long term lease, just a monthly tenancy. Being a smart business person, the buyer works out that there is a golden opportunity to gain himself an up-and-running business for a fraction of what the seller is offering it for sale. The buyer does some research into the owner of the rented premises, which is simple to find by doing a title search. He then contacts the landlord of the premises direct and tells him that he’s aware that there is only a monthly tenancy on the premises. And would the landlord be interested in having a long term tenant in his premises who is happy to sign a long term lease? What landlord wouldn’t prefer the certainty of a long term lease over a precarious monthly tenancy? The landlord and buyer negotiate a mutually agreeable lease term and sign a binding agreement. Next, the landlord instructs his solicitor to legally terminate the monthly tenancy with the business owner who is shocked to learn that he has to vacate his business premises within 30 days. And he hasn’t a legal leg to stand on. Because his tenancy was only monthly, the landlord doesn’t have to negotiate a long term lease with him if he chooses not to. The business owner is now in a very vulnerable situation, with the probability of him losing not only his business but also his business assets in the form of the fit-out of the business and other plant & equipment. Commercial landlords have a reputation for being ruthless when it comes to business and “doing the right thing” is a luxury rarely, if ever, extended to a “monthly” tenant. Whenever we encounter a business with a monthly lease, we warn the seller in the strongest terms of the danger they face if a cunning buyer should approach the landlord direct and negotiate a new lease. The business owner is blissfully unaware that he’s being sold down the drain by his landlord. When the new tenant moves into the vacated premises, he starts a business with practically everything in place, and immediately inherits the goodwill of the previous business owner, which has cost him absolutely nothing. The previous business owner thinks he’s being smart by not committing to a long term lease but the harsh reality is that he’s heading down the path of losing his business.