You’ve secured the business, equipment, key-personnel, supply contracts, licences and everything else that is needed to run a successful and profitable business. All that is left is the lease! When a new lease is being entered into, the procedure is relatively straightforward. The lease is to be negotiated with the landlord upon terms that are suitable to both parties. However, when purporting to effect an assignment of a lease from an existing tenant, additional considerations must be taken into account. An assignment of lease is not always possible and thus it is imperative that any doubts concerning the lease’s transferability are finalised at the early stages of the negotiation process.
Is the lease assignable?
When seeking to assign a lease, the first thing that needs to be determined is whether the lease is capable of assignment. If there is a prohibition on assignment, it may not be possible for the lease to be transferred.
Some comfort is afforded to those who are negotiating retail leases (those that are regulated under the Retail Leases Act 1994 (NSW)), as an existing tenant must be afforded a reasonable right to assign a lease.
Similarly, if there is a mortgage over the lease, you will first need to obtain the mortgagees consent. Failure to do so will invariably result in a breach of mortgage and will allow the mortgagee to take immediate possession of the premises. Furthermore, an assignment will not be binding upon a mortgagee unless their consent has been obtained in writing.
Terms of assignment
If an assignment of lease is permitted under the terms of the lease, the clauses governing the same must be carefully scrutinised. Failing to abide by the pre-conditions of the document may mean that the lease has not in fact been assigned. This could have devastating consequences if it is discovered after the commencement of business operations. Not only may it result in a breach of the lease itself, it may also affect a breach of mortgage terms (in circumstances where a security has been taken out over the lease).
An assignment of lease may give rise to stamp duty implications. Where the liability for stamp duty arises, it will be charged upon an ad valorem basis. This means that the rate of duty payable will increase as the transfer consideration amount increases.
Assignors continuing liability under the lease
Where the original tenant (assignor) has entered into some special personal covenant or promise with the landlord, they may continue to be liable for the same even after the lease is assigned to a third party. This means that should the third party tenant default on the promise, the landlord can have recourse against the assignor. Accordingly, when an assignment of lease is being affected, it is highly advisable that the assignor obtain a release from the landlord. While it is possible for the assignor to seek indemnity against the third party tenant, this in itself can be time consuming and costly.
Would you like to know more about the particulars involved in assigning a lease? Our friendly team of LegalVision leasing lawyers would be happy to assist you with any question or queries that you may have. Call us today on 1300 544 755 to see how we may help.
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