Who’s Who - The Various Parties to the Transaction
The full picture of a business or asset being transacted is shown when we consider the business relationships it has and their status.
In the vast majority of cases, a new transaction means the end of old ones. For example, if you’re buying a business, you may be ending the relationship the seller has with its landlord, its lender, subtenants, or vendors. You might be putting yourself “in the shoes of the seller” in some relationships, might renegotiate some others, and may terminate a few. You are, by analogy, conducting an organ transplant, where you need to cut away all the tissue and blood vessels from the seller and reconnect them to the buyer, all the while making sure that operations are not halted in the process. In this case, it’s important to know, from the start, “who’s who” when it comes to the relationships of the business or asset being transacted, and to what extent these relationships introduce risk or comfort to the deal.
(FYI: this is an excerpt from my 15-page e-guide, “Seven Ways to Better Deals”, which you can get for FREE when subscribing to my Weekly Newsletter.)
The Landlord. Think of the landlord as the king or queen of the realm. You may be dealing with the business owner as the seller, but the seller can only sell its business in a viable way by assigning the lease where it is merely the tenant, and that usually requires the landlord’s consent. Now, most leases would say that the landlord “may not unreasonably withhold consent” but if the seller is behind on rent, or is in material default of the lease, say, for allowing unauthorized subleases on its property, the landlord would love nothing more than to have the leverage of its consent over the whole deal. This is one relationship that, as buyer, you cannot avoid but have; it is good to be aware of the relationship between the seller, as tenant, and the landlord.
Tenants & Subtenants. On the flip side, if you’re buying or selling real estate, you are switching out the old landlord for a new one. Your biggest concern is whether the tenants and subtenants on the property you’re buying or selling are paying rent, are in good standing under their respective leases, and that they don’t have any claims against the landlord since those claims are soon to be against you as the buyer. In fact, most buyers (and their lenders) require written proof of the fact that all’s quiet and in good order - the Tenant Estoppel - which can then be used against the tenants as proof that they had no claims against the old landlord in case they happen to invent some later on.
Easements & Other Encumbrances. Let’s not forget about the neighboring properties. If you’re buying a piece of land with the thought of developing it into, say, a car wash, you better make sure that the seller of this property does not have any restrictive covenants with neighboring lots that prevent this kind of business from being set up to preserve the ambiance of the neighborhood. Similarly, if you want to build a building in a certain area, you should verify that there is no agreement that prevents structures from being built to protect the view from a neighboring property. This is the essence of due diligence.
Lenders. Lenders, and especially commercial lenders, are notoriously demanding to be notified of the changes to the assets they are underwriting. New tenants, if large enough, or new owners of the property, sometimes require lender approval. The relationship between the lender and the borrower is among the most intimate in the realm of business; the lender basically needs to know everything about you as the borrower, before deeming you creditworthy.