Premises are one of the most expensive outlays of any business, however do you understand your lease?
As the tenant, dealing with any landlord is often a David vs Goliath affair, especially in a major business transaction such as selling your business and assigning your lease. A very costly but common scenario is one where you may have entered into a deal with a potential buyer but the landlord delays or altogether, withholds its consent.
Assignment
Assuming you are the tenant under an existing lease, an assignment of lease is when the lease is transferred to a new tenant who steps into your shoes assuming your rights and obligations under your lease. An assignment must deal with your entire premises, so you cannot assign part of your lease. However, subletting may be an option should you wish to deal with part of your lease.
Another way an assignment occurs is when the entity which is the tenant under the lease undergoes a change in control in shareholding or management.
The Procedure
The procedure to assign a lease is usually set out in the lease document itself, however if your lease is a retail shop lease then the procedure is also set out in the Retail Leases Act 1994. Under the Retail Leases Act 1994, the landlord can only refuse an assignment of lease in two circumstances being if:
- the incoming tenant intends to change the use of the shop; or
- the incoming tenant has inferior financial resources or retailing skills.
Although, the landlord must determine what information it requires in relation to the incoming tenant’s financial resources or retailing skills, it is prudent for you to have information such as the relevant accounts and asset and liability statements, tax returns, business and other trading references for the incoming tenant available for the landlord.
A request for assignment must also be made in writing to the landlord and you must also comply with the requirements under the Retail Leases Act 1994, by providing copies of the prescribed disclosure statements to the incoming tenant.
Pitfalls
Failure to comply with the Retail Leases Act 1994, to give a proper Assignor’s Disclosure Statement under that Act or to negotiate adequate protections under assignment documents may mean that you will still be liable for the ongoing obligations under the lease regardless of the fact that the lease has been assigned and the incoming tenant has occupation. If this is the case, the landlord may come back to you to enforce the lease obligations upon you should the incoming tenant face financial difficulty, which could occur years after the assignment date.
It is highly advisable to consult a leasing lawyer to understand the obligations in your lease and to avoid the pitfalls of lease assignments.
Meridian Lawyers’ leasing team has over 50 years of combined experience specialising in leasing as well as being recognised as a premier leasing practice with clients ranging from retail shop tenants to international landlord entities.
Should you require advice about Commercial Leasing, contact Principal Penny Evans or Special Counsel Laura Forsyth.