Navigating Lease Agreements in Auto Repair Shop Transactions: Key Considerations for a Successful Transition

by Peter Tanella and Joshua Bauchner, Mandelbaum Barrett, PC

When purchasing an auto repair shop or body shop, one of the most critical factors to consider is the real estate where the business operates.

If the buyer does not plan to purchase the property outright, they will need to either assume the existing lease or negotiate a new one. Understanding lease agreements is essential to ensuring a smooth transition and protecting the buyer’s long-term business interests. 

Assumption of an Existing Lease vs. Signing a New Lease 

In most transactions, the buyer will face one of two scenarios: either the landlord will require them to assume the existing lease, or the buyer will be expected to sign a new lease. While the logistics of these processes differ, the fundamental terms and considerations remain largely the same. Here are key aspects to keep in mind: 

1. Premises and Location 

•  Occupancy: Does the shop occupy the entire building, or is it part of a multi-tenant commercial property? 

•  Neighboring Businesses: Are there complementary businesses nearby that could help drive customer traffic, or are there competitors in the same complex? 

•  Zoning Compliance: Ensure the property is zoned for auto repair or body shop use. Just because a shop is currently operating there doesn’t mean it is compliant long-term. 

2. Lease Term and Renewal Options 

•  If financing is involved, lenders typically require the lease term to match the loan term, often structured as a five-year initial term with renewal options. 

•  Some leases include a Right of First Refusal (ROFR), allowing the tenant to match any third-party offer to purchase the property. Beware of clauses that let landlords terminate the lease if the ROFR is declined. 

3. Base Rent and Adjustments 

•  CPI Adjustments: Many commercial leases include annual rent increases based on the Consumer Price Index (CPI). It’s crucial to negotiate an annual cap to avoid unexpected hikes. 

•  Percentage Rent: Some landlords may request a percentage of sales in addition to base rent – be cautious and negotiate accordingly. 

4. Additional Rent and Expenses 

•  Taxes: Most commercial leases require the tenant to pay a portion of property taxes. Clarify what percentage of these costs you’ll be responsible for. 

•  Base-Year Model: Some leases use a “base-year” system where tenants cover increases in real estate taxes over an established base year. If assuming a lease, negotiate to reset the base year. 

•  Insurance: Auto shops carry unique risks. Ensure the lease’s insurance requirements align with your needs and industry standards. 

•  Repairs and Maintenance: Responsibilities for maintenance, from HVAC to parking lot repairs, should be clearly outlined. Some leases shift significant costs to tenants – negotiate these  terms. 

5. Insurance Coverage 

•  The lease may require specific liability and casualty coverage levels. Have an insurance professional review these requirements to ensure they’re reasonable and cost-effective. 

6. Damage to Premises and Termination Rights 

•  The lease should outline whether the tenant can terminate the agreement if the building suffers significant damage (e.g., from a fire or natural disaster). This provision protects the tenant from being liable for rent while unable to operate. 

•  Avoid lease clauses that allow the landlord to terminate upon sale of the property. Such provisions can disrupt business stability. 

7. Subleasing and Assignment 

•  If you plan to eventually sell the business, a permitted transfer clause in the lease can make the tansition easier. 

•  The lease should state that landlord consent for a lease assignment cannot be unreasonably withheld or delayed. 

8. Indemnification and Legal Protections 

•  Seek mutual indemnification clauses to ensure both parties are protected in case of disputes. 

•  Consider negotiating an attorney’s fees provision, allowing the prevailing party in any dispute to recover legal costs. 

9. Signage and Branding 

•  If signage is essential for customer visibility, negotiate pre-approval of your signage requirements. 

•  Confirm whether there are restrictions on outdoor banners, pylon signage or window decals that could impact business visibility. 

10. Other Key Lease Considerations 

•  Quiet Enjoyment: The lease should ensure that you can operate without interference from the landlord or other tenants. 

•  Landlord Representations: Request assurances that the property complies with all local codes, environmental regulations and ADA requirements. 

•  Subordination Clause: Protect your lease from being overridden if the landlord’s lender forecloses on the property. 

•  Default and Mitigation: Some states, such as New York, do not require landlords to mitigate damages if a tenant defaults. Negotiate language requiring the landlord to seek a replacement tenant. 

By carefully evaluating these lease terms, auto shop and body repair business owners can safeguard their interests and facilitate a smooth transition. Consulting with experienced attorneys at Mandelbaum Barrett PC ensures that potential risks are identified and mitigated, setting the foundation for long-term business success. 

Want more? Check out the May 2025 issue of New Jersey Automotive!