Assigning a Retail Lease

Background

Any “Retail Lease”, that is, a lease of a shop that falls under the provisions of the Retail Leases Act 1994 (usually being, but not limited to, a shop for carrying on the businesses which appear on the list set out in Schedule 1 of the Act) may be transferred or “assigned”. The most common circumstance in which a lease is assigned is when a business is sold and the sale contract includes a term requiring the vendor of the business to assign the lease to the purchaser of the business.

Parties

An assignment of a Retail Lease involves at least three parties, being:-

• The landlord, or “Lessor”, being the entity (be it a company, partnership or individual) which owns the shop.

• The outgoing tenant, or “Assignor”, the entity which currently holds the lease but wishes to assign it to a new tenant.

• The new, incoming tenant, or “Assignee”, the entity which wishes to take over the lease from the Assignor.

It is also quite usual to have further parties to an assignment of a Retail Lease, being any personal guarantors of the Assignor and any personal guarantors of the Assignee.

Process

The assignment process can be governed both by terms of the Retail Leases Act (“the Act”) and by the terms of the lease itself. Noting, however, that where there is an inconsistency between the lease terms and the provisions of the Act may prevail, depending on the wording of the relevant section.

The first step is for the Assignor to obtain the Lessor’s consent to the assignment. Section 41 of the Act sets out the process the Assignor must follow. Note that these obligations are on the Assignor, being the party to the lease at that point in time and falling under the provisions of the Act. The Assignee would not (unless all parties agree) usually be dealing directly with the Lessor during this process. In short, the process to seek consent to assignment of the lease includes:-

a) The Assignor is to provide to the Assignee a copy of the disclosure statement issued by the Lessor to the Assignor when the lease was first entered (see s41(b) of the Act).

b) The Assignor is to provide to the Lessor a written request for consent to the proposed assignment, including information that is known as the “Assignor’s Disclosure” – see s41(a) of the Act and Schedule 2A.

Usually the Assignee will have already reviewed the terms of the lease and found them acceptable (for example, if the assignment is pursuant to a sale of business a copy of the lease will be attached to the sale contract). As the lease is being assigned, the Assignee will be taking the lease as-is. There is some scope for amendment of the lease, but is entirely dependent upon the agreement of the Lessor. The Lessor has no obligation to agree to any amendment to the lease.

Further, the Assignor may wish to avail itself of the protection afforded by s41A of the Act, which provides that if the Assignor also provides the documents set out in a) and b) above to the Assignee at least seven days before the assignment is effected, then the Assignor and any guarantor of the Assignor is not liable to the Lessor to pay any money due from the Assignee to the Lessor after the date of the Assignment.

The Lessor does not have to accept an Assignee if that Assignee would not be a good tenant. Section 39 of the Act sets out the only grounds on which a Lessor can refuse consent.

If the Lessor consents the usual next step is for the Lessor to prepare a Deed of Assignment of Lease (obviously, if the Lessor does not consent the process stops there). A Deed of Assignment is not strictly required under the Act. However, it is usual practice for a Lessor to insist on this document, as it formalises the transaction and can deal with any matters that the Act does not deal with. For example, a Deed of Assignment might have a express terms providing:-

i. that the Assignor and its guarantor/s (if any) will remain liable to the Lessor in the event that the Assignee does not pay any sums owing to the Lessor during the course of the Assigned lease. Section 41A, as set out above, overrides any such provision in a Deed of Assignment, but it is common practice for Lessors to include such a provision, as it will be effective it the Assignor does not comply properly with s41A.

ii. alternatively, that the Assignor and any guarantors are expressly released from any further liability under the lease.

iii. for any amendments to the lease agreed between the Lessor and Assignee (alternatively, this can be done by way of a further Deed of Amendment).

iv. personal guarantees for the Assignee. In this case the guarantors of the Assignee will also be parties to the Deed.

Once consent is given by the Lessor and the Deed of Assignment is entered, all that remains is to formalise the assignment, by way of stamping and lodging with the Land and Property Information the transfer of lease form.

Alternative

An alternative to the assignment process set out above is for the outgoing tenant to simply surrender the current lease and have the incoming tenant take a new lease. Unlike the right conferred on an Assignor to be able to assign a lease in accordance with s39, 41 etc of the Act there is no right to compel a Lessor to agree to accept a surrender of lease and enter a new lease with the incoming tenant. However, if all parties agree, this process can be quicker and cheaper than the assignment process set out above – particularly noting that no Assignor disclosure is required nor any Deed of Assignment.

If you are taking over a lease or wishing to assign your lease then get in touch with one of our business lawyers to see how we can assist by contacting your nearest Prime Lawyers office.

We have offices in Sydney, Parramatta, Chatswood, Sutherland and Wollongong.