When acquiring a business in Malaysia that operates from leased premises, the buyer must understand how the tenancy is affected and whether the existing terms remain suitable after completion.
To help, this article looks at key tenancy issues that can arise when acquiring such a business and how the commercial tenancy agreement is a key part of a successful deal.
How acquisition affects the tenancy
The way the business is acquired affects how the tenancy is dealt with.
In a share sale, the same company remains the tenant. The buyer should nevertheless check whether the change of control triggers any consent or notification requirements under the tenancy agreement.
In an asset sale, the buyer acquires the business and its assets but does not automatically become the tenant. The existing tenancy therefore needs to be dealt with as part of the acquisition, whether by transfer, novation or a new tenancy.
We cover this at length in our buyer’s guide to share vs asset sale agreements.
What to review in the existing tenancy
As part of the acquisition, the buyer should understand the key terms of the existing tenancy and how they fit with the business being acquired.
Some of the main points include:
| Issue | What to check |
| Remaining tenancy period and renewal | How much time is left on the tenancy and whether the buyer has an option to renew it |
| Assignment, subletting and change of control | Whether the tenancy can be transferred to the buyer, or whether the landlord’s consent is needed |
| Rent and other payments | The rent, service charges, utilities and any unpaid amounts |
| Permitted use | Whether the business can continue operating from the premises under the existing permitted use |
| Renovation and reinstatement | Any existing renovation or fit-out, and what the buyer may have to restore when the tenancy ends |
| Deposit | The amount held by the landlord and whether it will be transferred to the buyer or replaced with a new deposit |
| Personal guarantees | Whether any personal guarantees will be required |
| Condition of the premises | The condition of the premises, particularly where the buyer is taking over existing renovation, fit-out or equipment |
These terms can have a direct effect on the value and viability of the acquisition.
For example, a short remaining tenancy term can be a concern if the buyer is expected to spend substantially on the premises. The buyer may have limited certainty over how long the business can continue operating from that location.
For a broader discussion of commercial tenancy agreements generally, see our guide to commercial tenancy agreements.
How the tenancy can be transferred
For an asset acquisition, there are generally two main ways of dealing with the existing tenancy.
Novation
Under a novation, the existing tenancy continues but the buyer replaces the seller as tenant. The landlord also agrees to the change and becomes a party to the novation, while the seller is released from its obligations under the tenancy going forward.
The main advantages are continuity and speed: the existing rent, term and other tenancy terms can continue without starting again, which can reduce the time and back-and-forth involved in negotiating a fresh tenancy.
New tenancy
Another option is to end the existing tenancy and enter into a new one with the buyer. This gives the buyer an opportunity to negotiate the tenancy afresh, but may also result in a different rent, deposit, tenancy period or guarantee requirements.
Which is right for you
Which approach is appropriate depends on the circumstances of the acquisition and the landlord’s position. The important point for the buyer is that the choice can affect both the economics of the acquisition and the terms on which the business continues operating from the premises.
An assignment may also be possible where permitted under the existing tenancy, usually subject to the landlord’s consent.
Where landlord consent is required, the landlord may agree to the transfer on the existing terms or seek changes, such as a different rent, new deposit, new tenancy period or guarantee from the incoming buyer or its directors. The buyer should therefore establish the landlord’s position early in the acquisition.
Coordinating the tenancy and sale
The tenancy arrangements should be coordinated with completion of the acquisition. Where the buyer requires landlord consent, a novation or a new tenancy on agreed terms, these can be included as conditions precedent to completion under the acquisition agreement.
The buyer should also consider how the effective dates of the sale and tenancy arrangements are aligned, and how matters such as the tenancy deposit, outstanding rent and other payments are dealt with at completion.
If the buyer is taking over premises with existing fit-out, the condition of the premises can also be recorded at completion to provide a baseline for future reinstatement obligations.
Key takeaway
For a business operating from leased premises, the tenancy is an important part of the acquisition. Its remaining term, rent, permitted use, transfer requirements and reinstatement obligations can all affect the value and practicality of the deal.
The tenancy is also only one part of taking over a business. Depending on the transaction, other matters such as employee transfer arrangements, business assets and the structure of the acquisition may also need to be considered.
Let ELP support your business acquisition
Whether you are acquiring a business by way of a share or asset acquisition, we can assist with the acquisition documentation, tenancy and novation arrangements, and landlord consent process as part of the transaction. Contact us for an initial consultation.
