Due Diligence for that Assignment of LeaseSeptember 1st, 2015 by Thomas Oates
A portion of our practice includes business transactions and frequently involves buying and selling businesses and other asset sales which include the assignment of a leasehold interest. In fact, for many businesses the leasehold interest (the lease) is one of the most valuable assets being sold. Everyone assumes that if the asset sale involves the conveyance of real property then a title search and owner’s policy for title insurance would be issued as part of the sale to ensure that the property is not encumbered by a mortgage, lien or other restriction. But what due diligence should be done for those sales including the assignment of a lease?
Perhaps a short analogy would better illustrate the point. Let’s assume you are buying a restaurant. You know the restaurant industry well and have reviewed the financials of the restaurant and see a strong balance sheet and cash flow. You can see from the expenses that much of the net profit is due to the below market rent and it seems like there is a substantial term left on the lease, perhaps even an option to extend. You close on your purchase and come to find out the landlord is in foreclosure. Will the foreclosure affect your new business? Do you risk losing your business if the property is sold at foreclosure?
While negotiating an assignment of the lease in this age of foreclosures it is imperative that you do a little extra due diligence. Florida is a judicial foreclosure state. We are also a notice state. A lender seeking to foreclose a property must file a lis pendens as part of their foreclosure filing. The purpose of the lis pendens is to put the world on notice of the pending action for foreclosure. It also establishes the priority of interests.
Before you close on your next asset sale you should make sure the due diligence you are doing includes the review of the public records for instruments like a lis pendens which may ultimately affect your lease. It is important that you obtain and rely on knowledgeable counsel to make sure you are protected. The attorney’s at Law Offices of Oates & Oates practice in the areas of business transactions and real estate. Please let us know whether we can assist in your next purchase or sale.