Substitution

Substitution

When selling a business, not only is the actual acquisition or merger of interest. Many businesses also have an ongoing lease. It may be advantageous for the buyer and seller to have the lease continued with the buyer as the new tenant of the business space. This is called substitution. Subrogation of business premises is subject to a number of conditions. Therefore, it is important to have a good understanding of them.

What is substitution?

Subrogation of the tenant of business premises is a form of contract assumption. The tenant of business premises may substitute a third party, to whom he sells his business, in his place as tenant. All rights and obligations under the lease are transferred to the third party who buys the business. Subrogation is not only a useful tool in acquisitions and mergers, but also for entrepreneurs who have a shareholder buyout or a dissolve a partnership. The tenant makes a request to the landlord to allow the substitution. In principle, this request must be made before the takeover of the business, otherwise it can be default produce and lead to compensation or even termination of the lease. This is because it is usually not allowed to give the leased property to another person. So the substitution must be completed first.

What are the conditions for substitution?

Subrogation constitutes a restriction on the landlord's freedom of contract. The landlord is forced to tolerate the third party in place of the original tenant. To offer the landlord some protection, a number of conditions must be met for substitution. First, the business conducted in the premises must be transferred and the new owner must continue the business. Second, the seller must have a compelling interest in transferring the business. Finally, the proposed tenant (the buyer of the business) must provide sufficient guarantees for full performance of the agreement and for and proper conduct of business.

May the landlord refuse substitution?

There is a distinction between types of business premises. The rules regarding substitution are mandatory for medium-sized business premises (hotels, restaurants, stores and campsites). This may not be deviated from in the lease. However, different arrangements may be made in the leases of other business premises (offices, showrooms and wholesale). Furthermore, the lessor of a medium-sized business premises may not refuse a request for substitution addressed to him, provided the conditions discussed above are met. The lessor of other business accommodation may refuse a request for substitution (then called contract takeover), insofar as no agreements have been made about this in the lease.

Landlord refuses request for substitution, now what?

Subrogation is achieved by making a request to the landlord. If the landlord refuses this request, you can go to court. It is then advisable to contact a lawyer. The tenant progresses (in a so-called substitution procedure) the district judge to authorize him to put the new tenant in his place. The cantonal court only grants the claim if the above conditions are met. The rental law attorney at Lexys Lawyers can tell you more about substitution.