Who owns the premises of the family business?
As an owner of a family business it is not uncommon, at some point, to want to step back from the day to day running of the company and pass this responsibility onto other family members, quite often the children.
In this situation, there are many things that need to be considered; a key one being the future ownership of the premises out of which the business operates.
As a parent and head of the business, should they retain ownership of the building and allow the children to simply continue operating the business or should they grant the children the lease and if so, on what terms?
Whilst they may all get along now, what happens in the future if the children take the business in a new direction, against the wishes of the parent?
There are a number of options available to the parent:
- The premises could be sold to the children resulting in a ‘clean break’
- Their interest in the building could be transferred to their pension scheme. It is highly likely that the pension scheme would expect there to be a lease entered into with either the children concerned or their company, if the business is a corporate entity
- They retain ownership of the premises. In situations where a mortgage is secured on them then their bank may also require there to be a lease entered into with the children, to confirm the terms of their occupation.
If there is to be a lease:
- What is the rent?
- When is it to be paid?
- Does there need to be a rent review clause in the lease?
- How long is the lease to be for?
- Who is to be responsible for insuring the building and keeping it in repair?
- What happens if the children move the business to new premises – in what state should the current premises be left?
- Are the children entitled to make alterations to the premises without the approval of the parent’?
- Can the children transfer the lease to somebody new and if so, is prior consent from the parent required?
- Are the children to have first opportunity to buy if the parent decides to sell their interest in the premises?
It is often difficult for a parent to “let go” of a business, particularly if they have built it up from scratch. But by putting in place documentation that clearly states the terms on which their children can continue to operate the business, this should reduce the possibility of dispute(s) in years to come.