If you lease a commercial property to operate your business, there may be situations where you need to transfer the lease. There are usually two situations when a tenant will transfer (also known as an assignment) a commercial lease to another party (the assignee) before the end of a lease term. Namely, where the tenant is:
- selling their business, and the purchaser agrees to accept the existing lease rather than enter into a new lease with the landlord; or
- is proposing to exit the lease and has found a party who will take on the existing lease.
This article explains how the transfer of a commercial lease works. It also explains the critical terms of the deed of assignment from the perspective of the landlord, tenant and assignee.
1. Seek Your Landlord’s Consent
As soon as you propose an assignment as a tenant, you should:
- review the existing lease to identify if the lease can be assigned;
- identify the requirements of landlord’s consent upon assignment; and
- correspond with the landlord or agent as to consent and approval of the proposed assignee under the lease.
When seeking your landlord’s consent for the assignment, the proposed new tenant must usually provide their financial and business references to the landlord.
Can a Landlord Refuse to Assign a Retail Lease?
If the lease is a retail lease, the landlord will not be able to withhold consent to an assignment unreasonably. The retail legislation (different in each state) provides the grounds on which the landlord can withhold their consent. These generally include the:
- assignee proposes to change the permitted use;
- assignee has financial resources or retailing skills that are inferior to the assignor, and
- assignor has not complied with the relevant steps, per the retail legislation in that particular state, including providing a disclosure statement.
2. Deed of Assignment
After obtaining the landlord’s consent, a deed of consent to assignment is prepared (deed of consent).
A deed of consent is a legal document that outlines that the:
- landlord confirms their consent to the transfer of lease;
- tenant agrees to transfer their entire interest in the lease to the assignee from a specific date (the assignment date); and
- assignee, or new tenant, agrees to assume the rights and obligations of the lease as if they were the original tenant (such as repairs, security and payment of rent and outgoings) from the assignment date. This will continue until the end of the lease term and during any option or renewal terms.
The Landlord
Generally, the landlord’s key concern is that the transfer does not affect their rights under the lease. The landlord can address this concern by ensuring that the original tenant (assignor) has complied with all of their obligations under the lease until the assignment date. The landlord will have the right to take action against the tenant after the assignment date for any existing breach of the lease.
Additionally, the landlord will want to make sure that the assignee can comply with the lease obligations. This will often involve an assessment of the assignee as a tenant. The landlord will thoroughly examine the information before confirming their consent to the transfer. This might include:
- financial statements;
- business history; and
- professional references.
Finally, there is usually an agreement about who is liable for the costs of the deed of assignment. The landlord’s lawyer usually prepares the agreement. However, the outgoing tenant or the incoming tenant pays these costs, not the landlord.
The Outgoing Tenant
As the outgoing tenant, your key concern is to be released from your obligations under the lease from the assignment date. The deed of assignment can address this concern by specifying that:
- the tenant is released from any claims or liabilities under the lease from the assignment date (provided that there is not an existing breach of the lease); and
- if the tenant has provided any security, it is to be returned or refunded.
It is important for you to remember that you are bound to the terms of the lease until the transfer of the commercial lease is formalised through the deed of assignment. Accordingly, you should continue to comply with your obligations under the lease until the assignment date.
On that note, a landlord might not agree to release you entirely from your obligations if the retail legislation in your state does not prevent this. This means that if the new tenant defaults, you could be responsible for fulfilling the lease obligations. In that case, you would need guarantees or an indemnity from the new tenant.
If the transfer of deed has to be registered, typically with retail leases, you (the assignor) usually organise the registration of the transfer, whose costs are divided with the new tenant (the assignee).
The Assignee
The new tenant’s, or the assignee’s, key concern is for the landlord to accept the transfer of the commercial lease from the assignment date. The deed of assignment can address this concern by providing that:
- the landlord accepts the assignee as tenant from the assignment date;
- the landlord will observe their obligations specified in the lease in favour of the assignee; and
- if required in the relevant state, the parties sign a transfer of lease form and register the transfer at the land titles office.
The assignee should ensure that they have reviewed the contents of the commercial lease (including the disclosure statement if it is a retail lease). Then, they must review the lease before signing the deed of assignment. This is because the assignee will need to comply with the obligations of the tenant from the assignment date. These obligations may include the provision of security and a personal guarantee.
A personal guarantee is taken on by an individual to guarantee the obligations of another individual or entity. For example, the assignee providing may provide a personal guarantee where a particular party becomes a guarantor. If you cannot meet your obligations (such as to pay the lease), then the guarantor will have to meet that obligation themselves.
Costs
Before finalising the deed of assignment, it is important that the landlord, assignor and assignee agree on who bears the costs of preparing, negotiating and registering the deed of assignment. Generally, you, as the assignee, will bear the costs. However, you may choose to add a cap or exclude negotiation costs.
Continue reading this article below the form3. Transferring a Retail Lease
If the lease you are transferring is a retail lease, the tenant will typically need to give the assignee a disclosure statement. This statement also includes details of any changes to the disclosure statement that the landlord provided when the lease was first entered into.
The disclosure statement outlines the vital information that the assignee needs to know, including the:
- current annual rent under the lease;
- current estimated outgoings payable under the lease;
- term of the lease and any options to renew; and
- details of the premises.
Generally, the tenant may request an updated disclosure statement from the landlord before the transfer of the commercial lease. The landlord has an obligation to provide the updated disclosure statement, usually within 14 days from the date of the request.
The consequences of failing to provide a disclosure statement also differ between the states and territories. For example, the assignee may:
- withhold payment of rent;
- seek compensation from the landlord; or
- terminate the lease within a specific timeframe.
It is essential for all parties to be aware of the requirements and consequences of the disclosure statement provisions in their particular state or territory.
Stamp Duty
Additionally, transferring a lease may also lead to stamp duty implications. Stamp duty is a tax imposed on the purchase of assets and transactions of property. Therefore, if you are transferring a lease, you will commonly have to pay stamp duty. It is important that you are aware of the circumstances where you, as a tenant, will be required to pay stamp duty.
A factsheet that sets out the three ways to end a commercial lease in Australia: surrendering your lease, assigning it or subletting it.
Key Takeaways
Whether you are a landlord, tenant or assignee, it is crucial that you understand your rights and obligations when transferring a commercial lease. Further, the transfer of a retail lease leads to additional requirements and consequences related to the disclosure statement. Finally, you need to be aware of the steps you should take to ensure a smooth assignment.
If you need assistance with drafting or reviewing the terms of a deed of assignment, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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