If a business is sold, is the new owner obligated to honor existing contracts?

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If a business is sold, is the new owner obligated to honor existing contracts?

I have a day spa that I have for sale. I have contracts with independent contractors, that use my space for massage. Does the new owner have to honor these contracts? The buyer wants to keep all but 2 of the contracts, they state that they want new contracts with these 2 renters for the rent they pay has not been increased to match the newer renters. Each of their contacts will be up in about 9 months.

Asked on November 10, 2011 under Business Law, Washington

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

As a general matter, whether the new owner of a business is bound by pre-existing contracts depends on how the business is sold. If the business is an LLC or a corporation and the new owner buys the LLC or corporation (i.e. buys the actual business structure), he is bound by all contracts. If the new owner however does not buy an LLC or corporation, but "just" buys all the assets (e.g. name, customer list, assets, accounts receivable, etc.) he is only bound by those contracts which he chooses to assume (accept).

It's a little different with leases, however. When somone rents space from another--whether an apartment, a booth, or an office--and that person's landlord sells the property or assigns his own lease (if he is himself a tenant of the property owner), then then new owner will be bound by the leases to the tenants or subtenants. Leases bind the new owner of real estate; subleases will bind somone who took over another's lease.

So if these are actual leases for defined space, the new owner should be bound by  them. So the question is, are these agreements actually leases--renting a certain amount of space from you--or are they just agreements under which someone is free to offer their services in your space, but has no right to some specific area within it. In the former case, the new owner of your space should be bound by them; in the latter case, he'd only be bound if he bought the LLC or corporation or voluntarily chose to assume these contracts.


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