Owning the property where your business resides is often an attractive business proposition. When that happens, the lease between the entity that you use to acquire the building and your business entity becomes a very important document. Below are considerations to keep in mind when entering into a related party lease:
- The lender holding the mortgage on the building will have substantial input into what the lease looks like. Different lenders will accept more or less overbearing landlord provisions, and it is a matter of the bank’s attorneys’ preference, custom, experience, or understanding of the transaction that will determine how much the lease between you and your company has to look like a real, arm’s length, third party lease.
- Keep in mind that while the initial lease you enter into is a related party lease between 2 entities that you control, at some point the lease may be assigned to an unrelated third party if you sell (or transfer control of) the business. Therefore you should consider including standard provisions such as assignment and subletting, a confession of judgment, limitations on the use of the property, and the right to estoppels.
- Make sure there is room for lease renegotiation if you sell either the building or your business. The original lease terms that you entered into should not be considered set in stone. Business issues, like rent and term, that are not in sync with then-current market issues must be negotiated with the buyer, whether you are selling the building or the business. That will ensure not only a market rent, but reasonable provisions for the protection of both parties.
- On sale of either the business or the building, frequently, the original lease that was negotiated when you bought your company’s property will be terminated and a replacement lease will be entered into, effective at the closing. Don’t forget to obtain your lender’s approval.
In conclusion, while an intra-family lease may seem trivial, it is important to consider upfront the possibility of a subsequent sale of either the building or the business at some point in the future.
For more information on leasing to your own business or other real estate matters, contact Bernie Kolodner, Practice Leader of Kleinbard’s Real Estate Group, at firstname.lastname@example.org or at 215.496.7226.