Assignment of Commercial and Retail Leases

When buying or selling a business, it is critical that the parties to the transaction consider any lease in place for the premises from which the business trades.

In selling the business, the seller is not automatically absolved of liability to the lessor under the lease.  If the purchaser does not propose to continue to trade from the same premises, the seller will need to consider its liability to the lessor under the lease for the premises.

If, on the other hand, the purchaser of the business wants to continue to trade from the same premises, both the buyer and the seller will need to take steps to have the lease assigned to the purchaser.  It is very common for a commercial or retail lease to include a term requiring the lessor to consent to the assignment of a lease.

If the lease is for small commercial premises or retail premises or is otherwise governed by the Leases (Commercial & Retail) Act 2001(ACT) (the Act),[1] the procedure for assignment of the lease is dictated by the Act.

How to seek the lessor’s consent

The Act provides that a tenant may ask the lessor in writing to agree to the assignment of the lease to a new tenant.  The tenant must provide to the prospective new tenant a copy of the disclosure statement given to the tenant at the commencement of the lease and notice of any material change that may have occurred since the lease commencement.  If the tenant does not have the disclosure statement, the tenant may ask the lessor to provide another copy and the lessor must do so.

Once a tenant has made a request in writing to the lessor for consent to the assignment of the lease, the lessor has 14 days in which to ask for further information or documents.  The lessor may only ask for the type of information listed in section 96 of the Act, all of which are relevant to the lessor determining whether the prospective new tenant has the business skills and financial standing to run the business successfully and meet the tenant’s obligations under the lease.

The lessor’s rights and obligations upon receiving a request for consent

The lessor must advise the tenant whether it consents or refuses to consent to the assignment within 28 days of receiving the request for consent or, if further information was requested, within 21 days of receiving the further information.   If the lessor does not give written notice of its decision within the applicable time frames, the lessor is taken to have consented.

The lessor may only refuse to consent to assignment if it is reasonable in all the circumstances to do so.  The Act sets out certain grounds that are considered reasonable, including if:

  • the prospective new tenant does not have the financial resources or adequate skills to run the business;
  • the prospective new tenant, or the business conducted by the prospective new tenant, will not be compatible with other tenants in the building containing the premises;
  • the existing tenant has failed to rectify a breach of the lease.

If the prospective new tenant is a company, the lessor will normally require personal guarantees from the directors of that company as a condition of consenting to the assignment.

The lessor is entitled to recover from the tenant the reasonable costs incurred in making a decision about whether to consent to an assignment, including legal costs.

What happens on assignment?

If the lessor consents to the assignment, the lessor will usually require the outgoing tenant, the incoming tenant and all personal guarantors to enter into a deed that sets out clearly each party’s obligations in respect of the lease.  For any leases over 3 years, the assignment of lease should then be registered with the Land Titles Office so that the new tenant will appear on the title of the property.

Under the Act, upon assignment, the outgoing tenant and any guarantor of the outgoing tenant are released from further obligations under the lease.

What happens if the lessor refuses to consent to assignment?

If the lessor refuses to consent to the assignment of the lease, the existing tenant (not the prospective new tenant) may apply to the Magistrates Court to have the assignment allowed.  The tenant will need to satisfy the Court that the lessor’s refusal to consent was unreasonable.

[1] Eg child care centres, gardening supply centres, sports centres, art galleries

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