Buying a Business: What To Know About Lease Assignment
By Vee Naidoo
Updated on Reading time:5 minutes
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It’s easy to overlook assignment of the lease when buying a business. Business owners mistakenly assume that if the business is changing hands, so to will the lease agreement. This is not, however, the case.
A lease assignment is a process where one business transfers its existing lease to another. The existing tenant must obtain consent from the landlord. This is a formal process, and the landlord can refuse to provide consent in certain situations.
If you are purchasing a business, it’s important to secure the assignment of the lease to avoid uncertainty about the location from which you will operate. After all, no new business owner wants to find themselves in a position where they have to deal with unexpected relocation costs.
This article will explain the importance of securing a lease assignment when purchasing a new business, focusing on the assignment process for retail leases.
How are Leases Assigned?
State-based legislation governs the process to assign retail leases. Generally, the existing tenant will make an application in writing to the landlord to assign the lease. The landlord will then respond to the request within a specific timeframe. In some states, like NSW, if the landlord fails to respond within a 28 day period, it is automatically taken that the landlord has approved the assignment.
On the other hand, in other jurisdictions such as Queensland, if the landlord fails to respond with a one-month timeframe, a ‘retail tenancy dispute’ will arise. This dispute is then referred to the Queensland Civil and Administrative Appeal Tribunal.
In most states, retail lease legislation protects tenants and prospective purchasers by prohibiting landlords from unreasonably withholding consent to a lease assignment.
When Can a Landlord Refuse an Assignment?
Under most retail legislation, a landlord cannot unreasonably refuse consent. Securing an assignment of the lease when purchasing a business may then seem less crucial.
Purchasers should know the ‘reasonable’ grounds on which a landlord can refuse an assignment. We set these out in the table below.
Reasons for Refusal
there is a change in business operations that would not be permissible under the current lease;
the landlord considers that the proposed new tenant does not have sufficient resources or business experience;
the tenant has not complied with the reasonable assignment provisions specified in the lease; or
the assignment is in relation to an ongoing business, and the tenant has not provided the proposed assignee with the appropriate records (3 years’ worth).
None. However, section 50(2) of the Retail Shop Leases Act 1994 states that the landlord must not impose a condition which the existing tenant finds unreasonable or look to impose new conditions on the proposed assignee.
the proposed assignee seeks to change how the premises are used;
the proposed assignee does not have the financial standing required to conduct the business;
the proposed assignee does not agree to enter into a written agreement with the landlord in accordance with some or all of the terms of the lease; or
the proposed assignee does not have the necessary business skills.
the assignee seeks to change how the premises is used;
the assignee is unlikely to meet its financial obligations in relation to the lease;
the landlord considered the assignee’s retailing skills inferior to those of the existing tenant; or
the tenant has failed to comply with relevant procedural requirements in relation to requesting assignment of a lease.
the legislation does not specify any grounds, however, under section 10(1) of the Commercial Tenancy (Retail Shops) Agreements Act 1985, the landlord may only withhold consent on ‘reasonable grounds’.
the assignee proposes changes to the shop’s current use;
the assignee has financial resources or retailing skills that are inferior to those of the existing tenant; or
the tenant has failed to comply with the correct procedure for obtaining consent to the assignment.
the Leases (Commercial and Retail) Act 2001 does not specify any grounds. However, the landlord can withhold consent where it is reasonable to do so.
the assignee seeks to use the premises in a way the existing lease does not permit;
the landlord considers the proposed assignee lacks sufficient financial resources or business experience;
the tenant has not complied with the reasonable assignment provisions of the lease and the legislation; or
the tenant has failed to provide the proposed assignee with relevant prior business information.
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Purchasers should secure an assignment of the lease to ensure the stability of the business’ operations. Generally, landlords cannot refuse consent to an assignment unless it is on reasonable grounds as permitted by the relevant retail legislation and lease terms. It’s important you have a commercial leasing lawyer review the lease to ensure you understand any restrictions placed on the assignment that may affect your decision to purchase the business. If you have any questions, get in touch on 1300 544 755.
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