Buying a business – what about the property?

Xtreme Bikes Limited (Xtreme Bikes) is expanding its business into New Zealand and has decided to buy Wheelies NZ Limited (Wheelies NZ), a division of the Wheelies Group (all fictional entities).  Wheelies NZ has a nationwide distribution network comprising 20 sites for the distribution of bicycles. Some sites used by Wheelies NZ are owned by the Wheelies Group (terms of Wheelies NZ’s use are undocumented) and others it leases from third parties. Xtreme Bikes thinks it may need to reduce the number of sites used by Wheelies NZ in the short to medium term. Xtreme Bikes wants to know what property issues it should prioritise and where it should focus its resources on during the purchase process.

If you are working on a deal like this, here are our top tips to mitigate the risk of costly surprises from a property perspective and to ensure continuing use of sites after a business purchase.

Budget and resource to reflect the importance of property to the business

Where you are buying a business (or part of one), make sure that the portion of the project budget and resourcing that is allocated to property (e.g. for due diligence and transacting of the property) reflects:

  • its importance to the business – property is often a key enabler to a business’ ability to deliver services and execute core strategy – particularly a national distribution network like Wheelies NZ has
  • its financial cost – property costs are typically the second or third largest operating cost on the profit and loss account and are a significant asset or lease liability on the balance sheet
  • the risks to business strategy of its inflexible nature – property is usually a long-term commitment with changes requiring long lead-times

Be strategic, but always do basic due diligence

Undertaking due diligence on the sites will give you an insight to the current state of play, the feasibility of the proposed sale, and the ‘fit’ of the sites with your business’ property strategy. Like most businesses, you probably do not have a limitless budget, so getting the most value from your expenditure is important. Here are some tips to help:

  • identify the sites that are most important to the business and consider doing more thorough due diligence on those, and less on the other sites
  • be guided by your business strategy – for example, if, like Xtreme Bikes, you intend to rationalise the number of sites, then include a review of your exit options in your due diligence or negotiate the exclusion of certain sites from the sale, and
  • consider whether certain matters can be addressed by negotiating vendor warranties rather than you doing due diligence on those issues and discuss and agree such an approach upfront

We recommend you do basic due diligence on all sites, including obtaining and reviewing:

  • Land Information Memoranda (LIMs) from each relevant local authority
  • the records of title at Land Information New Zealand for each site
  • the terms of all leases (and ancillary documentation such as variations, renewals, rent reviews), and
  • specialist legal advice on whether you will require consent under the Overseas Investment Act 2005 for any aspect of the purchase

Get landlord consent

When you buy a business (or part of it), the change of ownership will often trigger the need to obtain landlord consent to the transaction under the leases held by that business. The type of consent will depend on the structure of the transaction. A share purchase may require landlord consent to change of control while an asset purchase may require landlord consent to assignment of the lease.

Either way, where consent is required, it is common for the lease provisions to require certain information to be provided to the landlord as part of the application for consent – commonly financial and good character information about the incoming purchaser. The landlord may have the right to ask for new guarantees or other security.

Failure to obtain consent will typically be a breach of lease that could result in the landlord terminating the lease.

Negotiate terms for new leases

If the vendor is to grant new leases of sites, then make sure you negotiate terms, and allow time in the purchase process for this. Circumstances when the vendor may grant a new lease could be:

  • vendor-owned property – to retain ownership of the property, it may grant a lease of the property to the division of the business it is selling
  • leased property used by both the division of the business it is selling and the parts of its business the vendor is retaining – to achieve business separation, the vendor may retain the lease and grant a sublease to the division its selling

As a purchaser, you will want assurance from the vendor about how much of any shared sites the division being sold uses. Such assurances may be in the form of vendor warranties. It is also important to find out about who owns the plant and equipment at sites. This will impact on repair and maintenance costs during the term of leases and the potential costs at the end of the leases.

If you would like help on a deal like this you are working on, please get in touch with one of our team.

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