Selling a commercial property with a sitting tenant

Navigating the sale of a commercial property while a lease is active requires a careful balance between legal obligations, tenant rights, and the expectations of potential buyers. Unlike selling a vacant property, transferring ownership of a tenanted commercial property introduces additional complexities that landlords must address to ensure a legally sound and commercially viable transaction.

At Newmanor Law, we understand that commercial landlords need clear, practical advice when considering such a sale. This guide outlines the legal framework governing these transactions, the rights and responsibilities of landlords, and the necessary steps to facilitate a smooth transition while avoiding potential liabilities.

Selling with a lease in place

A commercial property can be sold even when occupied by a sitting tenant. However, when such a sale occurs, the lease does not terminate; instead, it transfers to the new owner, who assumes the role of landlord with all associated rights and obligations. This process, known as “privity of estate,” ensures that the tenant continues to operate under the same lease terms, providing stability for their business while also making the property potentially attractive to investment buyers seeking an income-generating asset.

Selling a tenanted property may seem straightforward, legal nuances must be carefully considered to ensure compliance with the lease agreement and statutory obligations. The lease terms, tenant rights, and potential restrictions within the agreement all play a critical role in determining how a sale can proceed.

Understanding lease terms and the importance of due diligence

The lease is the foundation of any tenanted commercial property transaction. Before listing the property for sale, the landlord must carefully review the lease to understand any clauses that impact the sale. These may include:

• Assignment clauses: Some leases contain provisions that dictate how a landlord’s interest in the property may be transferred. While most modern leases allow for automatic transfer of the landlord’s obligations, older or bespoke leases may include restrictions that need to be navigated.
• Pre-emption rights: the tenant may also have a right of first refusal if the property is sold. If so those rights may need to be discharged before a sale can be completed.
• Notice requirements: Some leases stipulate that tenants must be notified of an impending sale, or that certain conditions must be met before ownership can be transferred.
• Tenant protections: If the lease is governed by the Landlord and Tenant Act 1954 and has not been excluded from its provisions, the tenant may have statutory right to renew their lease at the end of its term. This is a crucial consideration for potential buyers and should be clearly disclosed during the sale process.
• Transfer of rent and deposits: The outgoing landlord must ensure that any rent payments or security deposits held on behalf of the tenant are properly accounted for and transferred to the new owner to prevent disputes.

Failure to review and adhere to these provisions can lead to complications that may delay or derail the sale.

Tenant rights and the principle of ‘quiet enjoyment’

Tenants are afforded the fundamental right of “quiet enjoyment” under the terms of a commercial lease. This means that the tenant is entitled to operate their business without undue interference. A sale does not affect the lease itself, but landlords must ensure that the sale process, including viewings and inspections, does not disrupt the tenant’s business operations. This means giving the required notices as set out in the lease for any viewings or inspections.

Landlords are not always legally required to notify tenants before initiating a sale, maintaining transparency can be beneficial. A cooperative tenant can facilitate viewings and provide assurances to potential buyers regarding the property’s stability as an investment. Once the sale is completed, the outgoing landlord must formally notify the tenant in writing, providing details of the new owner and updated rent payment instructions.

For mixed-use properties, the Landlord and Tenant Act 1987 may impose additional obligations, such as offering tenants the right of first refusal to purchase the property before it is sold to a third party. Understanding whether these provisions apply early is essential to ensuring compliance.

The legal liabilities of outgoing landlords

For leases granted on or after 1 January 1996, landlords may be released from their obligations upon selling the property, provided the lease contains an explicit exclusion of liability clause. However, for older leases, outgoing landlords may retain certain responsibilities unless they take formal steps to negotiate a release. Failing to address these liabilities could expose the seller to ongoing claims even after the sale is completed.

Additionally, if there are unresolved tenant disputes, outstanding rent arrears, or repair obligations, these should be settled before the sale to avoid legal complications that could deter buyers. Otherwise,  detailed provisions will need to be included in the sale agreement.

The role of the Landlord and Tenant Act 1954

The Landlord and Tenant Act 1954 (the Act) grants commercial tenants a statutory right to renew their lease upon expiry, unless explicitly excluded at the time of granting the lease. If the Act applies, the new landlord must honour the tenant’s renewal rights unless they have valid legal grounds to oppose renewal in accordance with the Act, such as redevelopment plans.

A prospective buyer will want to understand whether the lease is protected under the Act, as it affects their future control over the property. Sellers should disclose this information early to avoid delays in negotiations.

The risks of overlooking legal considerations

Neglecting key legal considerations when selling a tenanted commercial property can lead to serious complications. Failure to comply with lease terms or statutory requirements may not only cause delays but could also expose the seller to legal disputes that jeopardise the transaction. If issues such as unresolved tenant conflicts, un-transferred deposits, or overlooked statutory obligations are not properly addressed, they can deter potential buyers or even give rise to claims post-sale.

A lack of due diligence can also result in financial repercussions. If a landlord does not correctly transfer rent payments or security deposits, they may remain liable for obligations they assumed were passed on. If a lease contains clauses that restrict or condition the transfer of ownership, a failure to adhere to them could invalidate the transaction or lead to costly legal battles or long delays.

In some cases, overlooking tenant rights could result in litigation, particularly if a tenant believes their statutory protections have been violated. To mitigate these risks, landlords should seek legal advice early in the process, ensuring that all contractual and statutory requirements are met before the sale proceeds.

Ensuring a smooth transaction

A successful sale of a commercial property with a sitting tenant requires careful preparation, and landlords should be mindful to:

• Conduct a thorough lease review: Understanding lease terms and potential restrictions is critical to structuring the sale appropriately.
• Communicate with the tenant: While not always legally required, maintaining transparency with the tenant can facilitate a smoother transaction.
• Resolve outstanding liabilities: Addressing rent arrears, maintenance issues, or lease disputes before marketing the property can enhance its appeal and is part of the good preparation we advise.
• Ensure proper legal documentation: Transferring rent, deposits, and obligations correctly to the new owner prevents post-sale liabilities.
• Seek expert legal guidance: Given the complexities involved, engaging a specialist commercial property solicitor ensures compliance with all legal requirements.

Selling with confidence

Selling a commercial property with a sitting tenant is not just a transaction – it is a legal process that demands careful navigation of lease terms, statutory obligations, and tenant rights. With thorough preparation and the right legal guidance, landlords can achieve a seamless sale at the same time as safeguarding their interests and those of their buyers.

At Newmanor Law, we specialise in advising commercial landlords on property transactions, ensuring that every aspect is managed with precision and legal compliance. If you are considering selling your tenanted commercial property, contact our team today for expert guidance tailored to your specific requirements.