Background
It is common when a seller sells his or her optician business, where the premises lease is being assigned, that they have to give the landlord of the premises an “authorised guarantee agreement”.
An authorised guarantee agreement, is the agreement of the seller to guarantee the performance by the buyer, who will become the new tenant e.g. if the buyer as new tenant does not pay the rent, the landlord can come after the seller. Or if the buyer as new tenant does not make good any repairs, again the landlord can come after the seller.
From the perspective of the seller this is obviously a high risk strategy, because the last thing a seller would want is to be sued after the sale for something they were unaware of and unable to control. This is especially true where the seller is retiring, and may not have provision for unexpected financial liabilities.
Often the position is resolved through the buyer agreeing to indemnify the seller, should the seller face any liability to the landlord under an authorised guarantee agreement.
Issue
In one transaction, where we were acting for the buyer, we faced a situation where the seller would not proceed with the sale if they had to provide an authorised guarantee agreement. They would rather have seen the business closed. Their view was if the landlord was coming after them under the authorised guarantee agreeement, most likely this would be because the landlord would already have tried unscuccessfully to have recovered from the buyer. Accordingly, if the buyer was not going to be good for the rent and repair liabilities to the landlord, the buyer was hardly likely to be good to them under an indemnity.
We approached the landlord to see if they would agree to waive the requirement for the authorised guarantee agreement which they refused, unless the buyer would lodge 12 months rent deposit and 12 months service charge on account. The buyer was not prepared to pay this amount on account. Understandably, in view of the amount of money involved, the maximum our client would agree to finance was up to 6 months rent on account.
After months of negotiations on other matters, it looked like the transaction may become abortive.
Solution
We considered a number of possibilities to keep the transaction afloat. We maintained it was in both buyer and seller’s interest to find a fair and equitable solution. We mooted the possibility for the 12 months rent deposit and service charge being financed jointly by the buyer and seller, with the seller’s share being financed from some of the proceeds of purchase price for the business. In other words, rather than pay over all of the purchase price for the business at completion, we deduct an amount equal to 50% of the rent deposit and service charge amount.
The downside for the seller was the delay in receiving this money held back. But the upside, apart from now seeing the conclusion of the optician business sale, was being able to retire without the uncertainty of liability under an authorised guarantee agreement. The upside for the buyer, was also being able to complete without having to fund the extra rent deposit and service charge the landlord wanted on account.
Conclusion
As can be typical with buying an optician business, there can often be seemingly impossible hurdles to pass over. However, with the mindset of continually trying to find a fair and equitable solution for all parties, there can often be ways to see, what may otherwise appear an abortive deal, over the line.
