The leasing agent insisted that the seller or buyer pay a lease assignment fee in a transaction where no lease assignment was involved.
Introduction:
In the world of business, selling a franchise often involves leased real estate, which adds complexity to the sale. This blog explores a case where a franchise seller lost a deal due to an unreasonable demand made by a mall’s leasing agent.
Background:
In 2002, the owners of the franchise in question signed a ten-year lease for a store located in a mall. As the lease was nearing its expiration in April 2013, the owners contemplated selling their business and engaged in discussions with a prospective buyer who owned other franchises of the same brand. The buyer expressed interest in securing a new lease for their company at the current location of the seller.
On March 1, 2013, an agreement was reached for the buyer to purchase the franchise assets for $70,000, subject to obtaining a satisfactory lease from the mall within 90 days. However, the deal fell apart when the mall’s leasing agent attempted to impose a substantial lease assignment fee, even though the seller had no intention of assigning their lease to the buyer.
During negotiations, the leasing agent insisted that the seller was attempting to assign their lease, which triggered a provision requiring them to pay the full $70,000 from the asset sale to the mall. The seller argued that they were simply allowing their lease to expire while the buyer pursued a separate lease, thereby rejecting the lease assignment fee.
In response, the leasing agent reduced the demanded amount to $20,000 and sought to collect it from either the seller or the buyer. On April 30, 2013, the last day of the seller’s lease, the leasing agent sent documents to both parties, including a proposed lease assignment and an extension offer for the seller’s lease until May 15, 2013.
The proposed lease assignment outlined terms for the buyer and stated that $70,000 from the asset sale would be payable to the mall, but the mall agreed to accept $20,000 as full payment. While the seller accepted the lease extension, they reiterated that they were not assigning their lease and therefore owed no fee.
Ultimately, the disagreement over the additional $20,000 fee demanded by the leasing agent prevented the seller and the buyer from signing the lease assignment. As a result, the sale of the franchise assets did not proceed, and the seller vacated their store on May 15, 2013, the end date of their lease extension.
Lawsuit:
The seller filed a lawsuit against the leasing agent and the mall, seeking damages for causing the deal to fall through.
Outcome:
The seller initially won the case at trial but had the decision reversed by an intermediate court. However, the seller eventually prevailed when the state’s Supreme Court restored the original trial win.
Case Reference:
See Branco v. Hull Storey Retail Group, LLC, Memorandum Opinion No. 2023-MO-009., Supreme Court of South Carolina (Heard March 29, 2023. Filed May 24, 2023).
Comment: This case serves as a prime example of how important third parties can influence and pose risks in business acquisitions.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
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