A local tenant's business sale is priced partly on your below-market rent. How to find the lease premium, what Wisconsin law says about consent and release, and why consenting with a rent reset usually beats both a rubber stamp and recapture.
When a local tenant sells its business, the buyer is mostly buying your lease. The chairs, the recipes and the customer list are worth something, but the reason the business sells at all is that it comes with a location at a known rent for a known number of years. The owner who waves the assignment through as paperwork is giving away the most valuable thing in the deal.
The request arrives as a formality: a broker's email, a closing date in three weeks, a polite note asking for consent. The landlord is the only party at the table who is not being paid, and the only one who does not have to say yes.
The buyer is paying for your below-market rent
Take a 1,800 square foot salon, eleven years in the center, with six years left on its lease at $16 a foot net. Comparable space in the trade area leases at $21. The owner is retiring and has a buyer, a stylist who has worked at another salon for years and wants her own shop, at $150,000.
The gap between the lease rent and market rent is $5 a foot, or $9,000 a year, for six years. That is $54,000 of rent the tenant will not pay, worth about $41,600 today at an 8% discount rate.
We call that the lease premium: the share of a business sale price that exists only because the lease is below market. Here it is roughly $41,600 of a $150,000 deal. The seller is collecting it. The buyer is paying for it. The landlord, whose building created it, is being asked to sign a form.
- Lease rent
- $16 a foot
- Market rent
- $21 a foot
- Loss to lease
- $54,000 over six years
- Lease premium today
- about $41,600
On your rent roll that gap is loss to lease. In a business sale, it is part of the seller's price.
Consent is the only reopener most leases have
Between signing and expiration, a lease is fixed. You cannot raise the rent because the market moved. The tenant cannot lower it because business is slow. The one exception most leases contain, often without either side thinking of it that way, is the transfer clause.
If the lease requires your consent to an assignment, the tenant needs something from you before its sale can close, and a buyer's check is waiting on the other side. That is the only point in the term when rent, term, security and use are all back on the table at once. It lasts about as long as the purchase agreement's closing date.
Owners lose that window by signing quickly to be accommodating, or by refusing outright. The useful answer is usually "yes, on these terms."
What your lease and Wisconsin law let you ask
Start with the lease, because Wisconsin law mostly defers to it. Under the landlord and tenant statute, a tenant with a lease (as opposed to a month-to-month tenancy) can transfer its interest unless the lease expressly restricts transfer. If your lease is silent, you may have less say than you think.
Most commercial leases do restrict it, in one of three forms.
Consent required, no standard stated. Wisconsin reads a duty of good faith into commercial contracts, and Wisconsin commercial lawyers generally treat a bare consent requirement as likely carrying an implied duty not to withhold consent unreasonably.
Consent not to be unreasonably withheld. The most common form. Reasons tied to the buyer's financial strength, whether the space suits the proposed use, and whether the use is lawful are the kind that hold up. Refusing in order to force a rent increase the lease does not provide for is riskier. The cleanest way to get a rent reset is to have written it into the transfer clause in the first place.
Sole and absolute discretion. The most landlord control, and the hardest to get from an experienced tenant.
Two more statutory points matter. First, consenting to one transfer is not consent to the next one, so a buyer who later sells again still needs you. Second, an assignee is liable only for breaches that occur while it holds the lease, unless it contractually assumes more. Require a written assumption of every lease obligation as a condition of consent.
This is not legal advice. Have a Wisconsin attorney read your transfer clause before you respond to a request.
Do not trade a proven tenant for an unproven one for free
Under the Wisconsin statute, a tenant that assigns its lease stays liable for the lease obligations unless the landlord expressly releases it or the lease says otherwise. That is the default, and it is the most valuable thing in the file. The seller's lawyer will ask you to give it up.
Look at what the release actually swaps. On one side: an operator with eleven years of history at this location and a guarantor you have known for a decade. On the other: a first-time owner with a good track record as an employee, a new LLC and a guaranty that has never been tested.
Every assignment is a credit swap. Unless the buyer is stronger than the seller, the landlord is being asked to accept a downgrade and to do it for nothing. Reasonable ways to price it:
- Keep the seller and its guarantor on the hook, at least for a period. A common compromise is to release them after the buyer has paid rent on time for two years.
- Require a new personal guaranty from the buyer's owner, supported by a personal financial statement.
- Increase the security deposit to reflect a first-time operator.
- Review the buyer like a new tenant: operating experience, a business plan, where the purchase money came from, and how much of the buyer's own cash is in the deal.
A sublease keeps the seller as your tenant automatically, but leaves you with an occupant you cannot enforce the lease against directly. An assignment with conditions is usually cleaner.
Reset the rent, or take the space back
Back to the salon. The landlord has three realistic options.
Consent as written. The buyer takes six years at $16. The landlord keeps the $54,000 gap for another six years and, without a new guaranty, a weaker tenant.
Recapture. Some leases give the landlord the right to terminate and take back the space instead of consenting. It sounds like the power move. Run it: six months of downtime, $10 a foot of tenant improvements and a leasing commission of $9,450 for a new five-year lease. At $21 a foot, the landlord comes out only about $7,650 ahead of simply keeping the salon at $16 over the same six years, and takes on the risk that the space sits longer than six months.
Consent with a reset. Consent on the condition that rent moves to $19 for the remaining term. The buyer still gets a lease $2 under market. The landlord collects $3 a foot more, $32,400 over six years, with no downtime and no build-out. That is 60% of the lease premium, captured by a signature.
- Consent as written
- $0
- Recapture
- about +$7,650
- Consent with reset to $19
- +$32,400
Recapture is usually a negotiating position, not a plan. The reset is the plan. A buyer who just paid $150,000 often wants more years than the seller had left, so offer them: a new term at market escalations, in place of an old option period at a fixed rent, can be worth more than the bump.
Write the next transfer clause before you need it
Most of the leverage in an assignment comes from language signed years earlier. For new leases and renewals, the transfer clause should say, in plain terms:
- Consent is required for any assignment, sublease or change of control of the tenant entity, including a sale of the business.
- The landlord may condition consent on the buyer's financial statements, operating experience and a new guaranty.
- The original tenant and guarantor are not released unless the landlord agrees in writing.
- The landlord may reset rent to market as a condition of consent, or recapture the space.
- A share of any consideration the tenant receives that is attributable to the lease, or any sublease rent above the lease rent, goes to the landlord.
- The tenant pays a fixed fee to cover the landlord's review and legal costs.
- The use clause stays as written. A buyer who wants to change the use needs a separate approval, checked against every exclusive you have granted.
That last point matters. A buyer who adds a retail line or a spa service can collide with another tenant's exclusive. Check the use before you consent, not after the other tenant calls.
When the consent request lands
- Read the transfer clause and note the consent standard, any recapture right and any profit share.
- Calculate the lease premium: market rent minus lease rent, times the square feet, times the years left.
- Ask for the purchase agreement, the buyer's financials and operating history, and the proposed use.
- Decide what you will ask for: a rent reset, a longer term, a new guaranty, more security, or no release of the seller.
- Put your conditions in writing quickly, and have your attorney draft the consent, the assumption and any guaranty.
A tenant selling its business is not a leasing event you have to accept. It is the only renewal negotiation that happens in the middle of a lease. If you want help pricing one, talk to us.