Fabricare Article May, 2006

If You Sell Your Dry Cleaners And Assign The Lease
To The Buyer, What Is Your Future Lease Liability?

Operators of dry cleaners generally lease rather than own the premises where their businesses are situated. When the day comes that an operator decides to sell his business, a transfer or assignment of the lease to the buyer will be necessary. Written leases customarily require the written consent of the lessor to an assignment of the lease and leases generally provide that such consent shall not be unreasonably withheld.

In most instances, consent is provided, the buyer takes over the premises, timely pays the rent, and completes payment of the purchase price to the seller. The lessor is happy because rent is timely received, the buyer is happy because the location produces adequate income, and the seller is happy because the purchase price is timely and fully paid.

Sometimes it doesn't work out that way! Perhaps you will be the seller whose run of luck has expired. Let us assume you wish to sell your business. You review your lease and find only three weeks remain to the end of your lease term. Astute fellow that you are, you quickly negotiate a new lease with the lessor providing for an additional five years, with two five-year options. You find a buyer, sell your dry cleaning business and assign the lease, and proceed to enjoy life by traveling around the United States attending various Dixieland Jazz Festivals.

As is customary, the assignment of the lease does not release you from liability in the event your buyer fails to pay the rent.

Six years later and one year into the first five-year option exercised by the buyer, the lessor, whose name you barely remember, drops you a note indicating that rent of $2,000.00 per month hasn't been paid for the past nine months and requests the appearance of your check on his desk for $18,000.00 in past due rent. You scratch your head, and wonder if you have any obligation to pay this past due amount.

You call the lessor and explain to him that the option was for the buyer's benefit and not your own, that the buyer exercised the option and you did not, that the buyer is operating the dry cleaners and you do not, and that the limit of your liability extends only through the initial five-year term of the lease.

The lessor laughs, and says that since you are the one who signed the lease containing the five-year options, thereby binding the lessor to provide the lease extensions, you are bound to pay the rent for any such extension imposed upon him by the buyer if he fails to pay the rent. Who is right?

An old California case, decided in 1920, tells us that the lessor is correct. Your next call to the lessor will thus be respectful, ingratiating, and probably on bended knee.

What if your lease negotiations with the lessor were slightly different? What if the lessor had refused to provide any options and would only provide you with a five-year lease? Assume you were nonetheless able to sell your dry cleaners and assign such a lease to the buyer. Assume the buyer held over for an additional year after the expiration of the five-year term, and the lessor took no action to remove the buyer from the dry cleaners under the theory that you remain liable anyway for any such holdover period.

Assume the lessor makes the same telephone call, requesting nine months' past due rent, asserting that the buyer would not be in a position to retain possession had you not assigned the lease to him. You respond that you should not be held liable for the holdover period since the act of holding over was not undertaken by you, but rather, by the buyer. Who is right?

This time, you win! A 1978 case in California advises that it is improper to impose liability on the seller under such circumstances for rent due for a period beyond the original lease, since the buyer did not have the right to remain after the expiration of the lease term.

The moral of the story? There are long-range consequences to lease negotiations and many traps for the unwary! In the old west, settlers employed guides to traverse the wilderness. These days, attorneys can help you traverse the wilderness of fine print!

[This column is intended to provide general information only and is not intended to provide specific legal advice; if you have a specific question regarding the law, you should contact an attorney of your choice. Suggestions for topics to be discussed in this column are welcome.] Reprinted from Fabricare
Myles M. Mattenson © 2006

	Myles M. Mattenson ATTORNEY AT LAW 5550 Topanga Canyon Blvd. Suite 200 Woodland Hills, California 91367 Telephone (818) 313-9060 Facsimile (818) 313-9260 *Email:* MMM@MattensonLaw.com *Web:* http://www.MattensonLaw.com	If You Sell Your Dry Cleaners And Assign The Lease To The Buyer, What Is Your Future Lease Liability?
Myles M. Mattenson engages in a general civil and trial practice including litigation and transactional services relating to the coin laundry and dry cleaning industries, franchising, business, purchase and sale of real estate, easements, landlord-tenant, partnership, corporate, insurance bad faith, personal injury, and probate legal matters. In providing services to the coin laundry and dry cleaning industries, Mr. Mattenson has represented equipment distributors, coin laundry and dry cleaning business owners confronted with landlord-tenant issues, lease negotiations, sale documentation including agreements, escrow instructions, and security instruments, as well as fraud or misrepresentation controversies between buyers and sellers of such businesses. Mr. Mattenson serves as an Arbitrator for the Los Angeles County Superior Court. He is also past chair of the Law Office Management Section of the Los Angeles County Bar Association. Mr. Mattenson received his Bachelor of Science degree (Accounting) in 1964 and his Juris Doctorate degree from Loyola University School of Law in 1967. Bi-monthly articles by Mr. Mattenson on legal matters of interest to the business community appear in alternate months in The Journal, a leading coin laundry industry publication of the Coin Laundry Association, and Fabricare, a leading dry cleaning industry publication of the International Fabricare Institute. During the period of May 1995 through September 2002, Mr. Mattenson contributed similar articles to New Era Magazine, a coin laundry and dry cleaning industry publication which ceased publication with the September 2002 issue. This website contains copies of Mr. Mattenson's New Era Magazine articles which can be retrieved through a subject or chronological index. The website also contains copies of Mr. Mattenson's Journal and Fabricare articles, which can be retrieved through a chronological index. In addition to Mr. Mattenson's trial practice, he has successfully prosecuted and defended appeals on behalf of his clients in various areas of the law. Some of these appellate decisions are contained within his website.