Lease Risk

Types of Lease Risk

Assignment risk: In an asset sale, leases must be assigned (transferred) to the buyer with the landlord's consent. Landlords are not required to consent, and some use the transition as leverage to renegotiate terms, require additional deposits, or impose new restrictions.

Expiration risk: A lease that expires within 2-3 years of the acquisition creates uncertainty. The buyer must either renew (at whatever market rate the landlord demands) or relocate (expensive and potentially business-disrupting).

Below-market rent: If the current lease is significantly below market, the renewal will be at higher rates — reducing future SDE. A business valued on current economics may perform differently under realistic future rent.

Above-market rent: Occasionally a seller has locked in above-market rent. This reduces current SDE and may be a valuation concern.

Personal guaranty requirement: Some landlords require the new tenant (buyer) to personally guarantee the commercial lease. This adds significant exposure, particularly for long-term leases in high-rent locations.

Lease Review Checklist

• What is the remaining lease term?
• Does the lease have renewal options? At what rent?
• Is assignment permitted without landlord consent? With consent?
• Has the landlord been contacted about the pending sale?
• Is there a personal guarantee currently in place?
• What are the permitted uses under the lease?
• Are there co-tenancy clauses or exclusivity provisions?

The Landlord Conversation

One of the most important due diligence conversations is directly with the landlord — ideally before signing an LOI. Understanding the landlord's willingness to consent, their expectations for the new tenant, and the likelihood of renewal is critical for location-dependent businesses.