Assignment and Transfers of a Commercial Lease

A commercial lease transfer is often called an assignment of commercial lease or retail lease. It is when a tenant (in this context known as an assignor or transferor) assigns or transfers to a new tenant their rights under a lease. The effect of this is that the transferor is no longer the tenant under the lease and the new tenant becomes the tenant under the lease.

Common reasons why a tenant would want to transfer a lease

A transfer of lease usually occurs where a tenant wants to vacate a property. The most common reasons a tenant wants to vacate a lease are:

• it may have outgrown the premises and needs larger premises.
• its business is struggling and can no longer afford to pay the rent; or
• it is selling its business to a new person who will be taking over the lease.

A transfer of lease or assignment of lease is a formal document. The document is entered into between all three parties being the landlord the current tenant as assignor and the new tenant as assignee.

Does a landlord need to consent to an Assignment of Lease

When a tenant wishes to assign their rights under a lease to a new tenant the first step is to for the current tenant to ask for the landlord’s consent to an assignment of the lease. A landlord must agree to a transfer of lease and an assignment of lease without the landlord’s consent will be invalid and generally a breach of the lease by the tenant.

Before a landlord will give consent to a transfer of the lease it will typically want to know:

• whether the new tenant intends to continue using the premises for the same purpose or whether the new tenant intends to use the leased premises for a different purpose. An example of this might be where the current tenant is using the premises as a chemist shop and the new tenant wants to use it as a clothing boutique.
• the financial circumstances of the proposed new tenant. This is so the landlord can assess the new tenant’s ability to pay the rent. Often a landlord will ask for financial references and trading references so that it can be certain the new tenant has the financial resources to continue paying the rent. The landlord may even ask for the proposed business plan of the new tenant.

So when the current tenant is looking to transfer the lease it is a good idea to have some idea of the financial circumstances of the new tenant. This is particularly important where the current tenant is selling their business and a new owner is coming in. If the landlord does not consent to the assignment of the lease, the whole business sale can fall over.

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Can a Landlord Refuse to Consent to an Assignment of Lease?

It has been held by the courts in a number of cases such as AVC Operations Pty Ltd v Teley Pty Ltd (Building and Property [2018] VCAT 931 that with a Retail Lease a landlord, when considering whether to consent to a transfer of the lease must act reasonably. This does provide some protection to the tenant.

However the situation may be different with a non-retail lease depending on the wording of the lease.

Personal Guarantees Bank Guarantees and Security Bonds

When transferring a lease, the assignor will want to be released from any guarantee that its directors or other parties may have given to the landlord. This can often be a separate negotiation.

Similarly, where a bank guarantee or security bond was given, it is important to ensure that the new tenant replaces the bank guarantee or security bond so that the assignor has no ongoing exposure in the event the new tenant breaches the lease.

Assignment of lease

Where the proposed transfer of lease is of a retail lease under the Retail Leases Act there are procedures that need to be followed. If the new tenant does not intend to use the premises for the same purpose, then the assignor must give a copy of the original disclosure statement it received when it entered the lease to the new tenant. If the assignment of lease involves a sale of business and the new tenant will be continuing the business, then the assignor also must prepare and give a disclosure statement to the new tenant that complies with the requirements of the Retail Leases Regulations 2013 http://www5.austlii.edu.au/au/legis/vic/consol_reg/rlr2013244/. More reading on the subject, can also be found here on the VSBC Commercial Leases Transfer page.

It is important that when negotiating a transfer or assignment of lease, it is done properly. As expert commercial lease transfer lawyers we are able to help you get it right.

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