Can a lease rider change terms if the lease gets transferred?

[Tamas Z.]

Hi all,

I'm in the process of drafting a new lease for a tenant whose lease is up for renewal.

This tenant is a bit of a special case: Basically, a personal friend with a really good rental deal.

He is starting to look into selling his business, and it's not clear when that will happen. I want him to keep paying the "friends and family" discounted rent, but if he sells the business and the new owner takes over, I want the new owner to be subject to the "regular" (non-discounted) rate.

The "discount" for the friend is basically, a reasonable base rate, but while we take care of the NNN operational costs (so, no additional rent for tax/insurance/operations).

The approach I want to take with the lease rider is to say something like:

"While <business> is owned by <friend>, 'friends and family' package applies. If <business> is taken over by any other owning entity, the 'friends and family' package no longer applies"

(and then describe the terms of the friends and family package).

That way, I can comfortably set up a longer term lease, without getting stuck with the lower rental income when he does sell and transfer his business to a new owner.

Is this doable? If not, I'd love to hear what advice those with more experience have to offer about this kind of thing.

Thanks!

[Roy N.]

@Tamas Z.

You could/should set your rent rate to be market and then, if you choose, provide a rebate back to the current tenant.   This rebate can be non-transferrable.

Alternatively, the lease could terminate or become renegotiable upon sale or transfer to the business.

[Roy N.]

@Tamas Z.

You could/should set your rent rate to be market and then, if you choose, provide a rebate back to the current tenant.   This rebate can be non-transferrable.

Alternatively, the lease could terminate or become renegotiable upon sale or transfer to the business.

[Martin Z.]

Isn't there an assignment clause that would require lessor approval before lease assignment? If so, once the tenant wants to assign their lease, the new lease amendment drafted by the lessor can adjust the base rental figures. So in this scenario, you wouldn't indicate a "different rate" from the getgo. 

[Joel Owens]

Does your friend disclose monthly and annual sales per the lease?

If they do you can take there all in annual sales versus the rents to get a ratio. If it's a restaurant you generally want no more than 10%. So if rent is 50,000 a year you want annual sales of at least 500,000.

If there rent ratio is 12,15,17 percent they are barely surviving instead of thriving as a business if it's food. Other tenant types can run a little higher on sales ratio as they have minimal labor costs etc. 

I understand the need to raise rent if someone else takes over but that could push the business into a non-profitable level and then your friend could not sell the business.

Example they currently pay 50,000 with sales of 500,000 for a restaurant for 10% rent to sales ratio. You want to take new rent to 70,000 annually which is a 14% rent to sales ratio. That puts the business in the danger zone and turns off a potential buyer knowing rent is fixing to skyrocket.

Instead you could do something like a base rent of XX (your friends level) and then for every sale above XX in volume in each month you get landlord bonus rent. You would need to include a clause that is was ALL sales in store or online so that they could not push most sales reported online to reduce what they pay.

What you do or not will depend on vacancy in the area and competition. If there are many options to move to then as a landlord you can't be as demanding with your terms and conditions.

Whatever you do have an attorney draft the legal language changes to the lease.

No legal advice given.    

[Tamas Z.]

Thanks, everyone, for the thoughts!

@Roy N.: That sounds like an elegant way to do things. Is the rebate approach mainly to minimize changes to the lease, or even to just have the rebate be a separate contract that's not part of the lease at all?

Are there tax implications to doing that? Do those rebates count as regular "expenses"?

@Martin Z.: There's definitely an assignment clause, but if the lessee is "the business", then selling the business doesn't really change whom the lease is assigned to, because it's the business entity. Unless I put the owner personally on there as well, with some kind of languaging, which would require a lease change anyway for the name swap when he sells.

@Joel Owens: Thanks for this insight, this is really neat. I don't think there's anything in there asking tenants to disclose their income.

[Roy N.]

@Tamas Z.

If you were starting fresh with a new lease, I would use something along the lines of the approach described by @Joel Owens.   Establish the base rent to meet your threshold while not overly burdening the business that is renting the space - it's in your best interest to see it thrive even if it changes hands.

If you have an existing lease at a set amount and you are crediting/rebating back a portion of the rent to the current owner, you can end the rebate/credit if control of the business changes.    However be certain you are rebating the current owner because he is a friend and that the business does not depend on that rebated rent to be attractive to a potential suitor ... otherwise, your friend will have a hard time selling his business and the new owners may not be able to make a go of it w/o the rebate.

The above aside, you can make the rebate part of the lease; as a separate agreement that is attached as a schedule to the lease; or do it informally (which could have problems of its own).  Check with your accountant to see which approach is preferred from a bookkeeping / tax perspective ... up here I would prefer to arrange for the rebate/discount to be either unrealized income or cost of sales (since it is a rent concession).