When a landlord and a tenant enter into a lease of a retail premises (“Retail Lease”), the Retail Lease usually contains provisions that allow the tenant to assign the Retail Lease to a third party. Assignments often occur when a business is sold and the purchaser of the business is assigned the Retail Lease of the relevant business premises, when the tenant wishes to relocate to another premises or if tenant has had decided to cease operating its business.
What is an assignment of a Lease?
An assignment of a Retail Lease is a transfer all of the tenant’s legal rights and obligations under the Lease to a new tenant. An assignment is usually governed by a legal document signed by the landlord, tenant, new tenant and any guarantors.
Under Section 8 of the Retail Leases Act 2003 (Vic) (“Act”), an assignment of a retail lease is taken to be a continuation of the lease. That is, it is not a new lease.
Does the landlord need to consent to an assignment?
A standard form Retail Lease will require the tenant to obtain the landlord’s consent to an assignment of the Lease.
Section 61 of the Act sets out the prescribed process for obtaining a landlord’s consent to an assignment of a Retail Lease. A request by a tenant to a landlord for its consent to an assignment of a Retail Lease must be in writing. The request must include such information as the landlord reasonably requires in relation to the financial resources and business experience of the proposed new tenant.
Prior to requesting the landlord’s consent, the tenant must provide to the proposed new tenant a copy of any disclosure statement that was provided to the tenant regarding the lease and details of any changes of which the tenant is aware, or could reasonably be expected to be aware, that has affected the information in that disclosure statement since it was provided to the tenant (“Disclosure Requirements”). In complying with Disclosure Requirements, the tenant may request that the landlord provide a disclosure statement that is current from a specified date that is within 3 months before the statement is given. If the landlord does not provide the updated disclosure statement within 14 days, the tenant is not required to comply with the Disclosure Requirements.
A landlord must deal with the request for consent to an assignment expeditiously and is deemed to have provided its consent if the tenant has complied with all provisions under Section 61 of the Act and the landlord has not provided notice to the tenant consenting or withholding consent to the assignment within 28 days of the date on which the tenant made the request.
When can a landlord withhold consent?
Under Section 60 of the Act, a landlord may only withhold its consent to the assignment of a Retail Lease if:
- the proposed new tenant intends to use the premises in a way that is not permitted under the Retail Lease;
- the landlord considers that the proposed new tenant does not have adequate financial resources or business experience to meet the obligations under the Retail Lease;
- the tenant has not complied with the reasonable assignment provisions of the Retail Lease; and/or
- the assignment is in connection with a retail premises that will continue to be used for the carrying on of any ongoing business and the tenant has not provided the proposed new tenant with business records for the previous 3 years or such a shorter period as the tenant has carried on the business at the subject premises.
When does the assignment take place?
Under Section 7 of the Act, a Retail Lease is assigned the earlier of the following:
- the new tenant enters into possession of the premises with the consent of the landlord; or
- the new tenant begins to pay rent for the premises; or
- the document governing the assignment is signed by all of the parties to it.
Who pays for the costs of the assignment?
Under Section 51 (1), a landlord is not prevented from claiming reasonable legal costs or other expenses incurred by the landlord in connection with the assignment of a Retail Lease, including investigating a proposed new tenant and obtaining any necessary consents to the assignment.
If you are a landlord or a tenant under a Retail Lease and an assignment or transfer of lease has been proposed, it is recommended that you obtain legal advice in relation to your rights and obligations with respect to the assignment process and any legal document governing the assignment. If you would like to speak to a member of our Property Team in relation to a prospective assignment of a Retail Lease or any other leasing matter, please do not hesitate to contact us on (03) 9822 8588.
Insight written by George Hanger