Transferring business premises and licences: how to do it without losing the business
A traspaso — the transfer of a going concern in leased premises — is at once an assignment of the lease as against the landlord, a sale of assets as against the outgoing tenant, and a procedure at the town hall. All three are settled in the same document, and when one of them is neglected the buyer ends up with premises they cannot open. We explain what the law says and what has to be checked before signing.
What a traspaso is today
The word traspaso comes from earlier legislation, but the transaction is still the same and breaks down into three deals that live together in a single contract:
- An assignment of the lease of the premises, which affects the landlord.
- A transfer of business assets: furniture, machinery, fit-out, stock and, where applicable, the trading name and the goodwill.
- A change in the administrative holder of the licence or of the declaration that covers the activity.
Each has its own rules and its own risks. What turns a traspaso into a problem is treating them as if they were one.
Assignment of the lease: article 32 LAU
This is the rule almost nobody knows and the one that decides the transaction. Where a business or professional activity is carried on in the leased property, the tenant may sublet it or assign the lease without the landlord’s consent (art. 32.1 of the Ley de Arrendamientos Urbanos, LAU, the Urban Tenancies Act). In exchange, the law gives the landlord an increase in rent: 10 per cent on a partial sublease and 20 per cent on an assignment of the lease or a sublease of the whole (art. 32.2).
Two points of considerable practical use:
- A change in the person of the tenant through the merger, conversion or division of the tenant company is not treated as an assignment, although the landlord is still entitled to that increase in rent (art. 32.3).
- Both assignment and subletting must be notified to the landlord by a verifiable means within one month of being agreed (art. 32.4).
The mistake that costs the premises. Art. 35 LAU allows the landlord to terminate the lease outright where the premises are assigned or sublet in breach of art. 32. In other words: the right to assign exists, but failing to notify it in the proper form and time turns a legitimate transaction into a ground for termination. And that statutory right under art. 32 may in any event be modified by the lease itself, which is the first thing to read: many leases of business premises require the landlord’s express consent, and such a clause changes the whole approach.
With and without fit-out
The difference is not only one of price. It changes what has to be documented and what can be claimed afterwards.
Transfer with furniture and fit-out. A detailed inventory must be attached — with makes, models, serial numbers where they exist and condition — forming part of the contract. It has to be established that the assets belong to the outgoing tenant and are free of charges: it is common to find machinery on rental, on finance lease or subject to retention of title, which the buyer believes they are buying and which does not belong to the seller. It must also be expressly settled who is liable for later breakdowns, and for how long.
Transfer without fit-out. What is transferred is, in essence, the contractual position and the location. The price is justified by the position, the unexpired term of the lease and the rent. Here what matters is the state of the premises and, above all, the fitting-out works the new occupier will need: who may carry them out, whether they require the landlord’s authorisation, and whether they will accrue to the property at the end of the lease.
The licences: what is really being bought
In most transfers the value lies in being able to open tomorrow with the activity that was already being carried on. That depends on the administrative authorisation covering the activity, which today, depending on the municipality and the type of activity, is either a licence or a declaration of compliance (declaración responsable).
- The change of holder is usually a joint notification by transferor and transferee to the town hall, but each municipal by-law lays down its own procedure, its own deadline and its own paperwork.
- A licence covers a particular activity at particular premises. If the new holder is going to change the activity, or to carry out works that alter the conditions, a change of name is not enough: a new authorisation has to be applied for.
- It has to be checked that the licence is in force with no proceedings open, that the premises comply with the conditions on which it was granted, and that there are no outstanding enforcement orders, notices or penalties.
- In activities with additional requirements — catering with a kitchen or a terrace, healthcare, pharmacies, veterinary practices, workshops — sector authorisations from the Comunidad de Madrid (the Madrid regional government) also come into play and follow their own course.
Buying premises «with a licence» that has none. This is the situation that most often ends up in court. The buyer pays for the transfer, goes to the town hall and discovers that the business was operating with no authorisation at all, with one that had lapsed, or under a declaration of compliance that did not cover what was being done there. Which is why the check at the town hall is made before signing, and the contract makes payment of the price — or part of it — conditional on the change of holder being completed.
Checks before signing
- The complete lease and its schedules: unexpired term, rent and rent reviews, deposit and additional security, clauses on assignment, works and permitted use.
- That the rent is up to date and that there are no proceedings open: rent arrears from before can bring down the very lease that has just been bought.
- Title to the property and charges over it, from a land registry extract: the premises may be mortgaged or subject to enforcement.
- The administrative position of the activity at the town hall, in writing.
- The business’s debts: utilities, the community of owners, the tax authorities and social security — and staff, because where there are employees there may be a transfer of undertaking, with the contracts passing across and joint liability for employment and social security debts.
- Charges over the assets being transferred: rental, finance lease, retention of title.
The compensation under article 34
A right that is frequently forgotten. Where a lease comes to an end on the expiry of its agreed term and for the last five years a retail business selling to the public has been carried on at the premises, the tenant is entitled to compensation from the landlord, provided they have given four months’ notice before the expiry of the term of their wish to renew for a minimum of five further years at market rent (art. 34 LAU).
The amount depends on what happens next: if the tenant restarts the same activity in the same municipality within the following six months, it covers removal costs and the loss from lost custom; and if they start a different activity or none at all, and the landlord or a third party carries on the same or a related activity at the premises within that period, the compensation is one month’s rent for each year of the lease, up to a maximum of eighteen months.
The requirement that decides everything is the four months’ notice. Without it there is no right, however much custom has been built up. It is the kind of deadline worth diarising on the day the lease is signed.
How we handle it, step by step
Read the lease before the price
Unexpired term, rent, clauses on assignment and on works, agreed use and security. That is what tells you whether the transfer is possible as proposed and what it is really worth.
Administrative check at the town hall
What authorisation covers the activity, whether it is in force, whether proceedings are open, and the exact procedure for the change of holder. In writing, and before anything is signed.
Contract with inventory and payment terms
A signed inventory, representations and warranties from the outgoing tenant about debts and charges, and staged payment conditional on the change of holder actually going through and on the landlord’s acceptance where that is needed.
Formal notice to the landlord
Within the month required by art. 32.4 LAU, with the right content. It is the step that stops the landlord terminating the lease outright.
Completion and follow-up
Transferring the utility accounts, registering the activity, taking on the staff where that applies, and checking that the deferred undertakings are honoured.
Frequently asked questions
Can I transfer without the landlord’s permission?
If a business or professional activity is carried on at the premises, the law allows the lease to be assigned without the landlord’s consent, the landlord being entitled in exchange to raise the rent by 20 per cent (art. 32.1 and 2 LAU). But it has to be notified to them by a verifiable means within one month (art. 32.4) and, above all, the lease has to be read: if it contains a clause requiring the landlord’s consent, that clause prevails over the general rule.
I assigned the premises and the landlord wants to terminate the lease.
Art. 35 LAU allows the landlord to terminate outright where the assignment or sublease was carried out in breach of art. 32 — typically, without formal notice in time, or against what the lease provided. You have to look at what was notified, when and how, and at exactly what the lease said. It is not always lost, but you have to act quickly.
I bought a transfer «with a licence» and the town hall says there is nothing.
That is a breach by the outgoing tenant if the contract stated that the activity was authorised. Depending on its seriousness it may give rise to termination of the contract with repayment of the price and damages, or to a reduction. The first step is to document the real administrative position with something in writing from the town hall itself, and then to claim in writing. It is best not to start investing in the premises in the meantime.
If premises are transferred to me with employees, am I stuck with them?
Where what is transferred is a going concern as an operating unit, there is usually a transfer of undertaking, with the employment contracts passing across and joint liability for earlier employment and social security debts. It is one of the points that causes most trouble afterwards, which is why it is checked before signing and dealt with in the contract.
My lease of the premises is coming to an end. Am I entitled to anything?
You may be. If for the last five years you have carried on a retail business selling to the public there, and you give four months’ notice of your wish to renew for five further years at market rent, the ending of the lease on expiry of the term entitles you to compensation (art. 34 LAU), which can reach eighteen months’ rent. Without that notice there is no right: diarise it as soon as you sign.
Where we work
Our office is in Villanueva de la Cañada, with cases in Brunete, Villanueva del Pardillo, Valdemorillo, Quijorna, Majadahonda, Las Rozas, Boadilla del Monte, Pozuelo de Alarcón and the rest of western Madrid, where every town hall has its own by-law for the change of holder of a business activity. This page forms part of our civil law and tenancies practice; see also commercial leases and administrative penalties and judicial review.
Tell us about your case
If you are about to transfer business premises or take one on, bring us the lease and whatever you have been told about the licence, before you hand over any money. We review all three fronts and draft the contract. We study every case before taking it on, and we tell you frankly what risks the transaction carries.
First consultation: quoted before we start.
28691 Villanueva de la Cañada (Madrid)