Summary
- Transferring a commercial lease usually involves assigning the lease to a new tenant, who takes on all rights and obligations from an agreed date.
- The landlord’s consent is typically required, and they will assess the incoming tenant’s financial position and experience before approving the transfer.
- A deed of assignment formalises the transfer and may address liability, security, and costs between the parties.
- This guide explains how to transfer a commercial lease for Australian business owners, including the legal steps and risks involved.
- It is prepared by LegalVision’s business lawyers, a commercial law firm that specialises in advising clients on commercial leasing matters.
Tips for Businesses
Review your lease before starting the transfer and confirm the assignment process. Obtain landlord consent early, assess the incoming tenant carefully, and document the transfer through a deed of assignment. Continue meeting your obligations until the transfer is finalised to avoid ongoing liability.
Transferring a commercial lease, known as an assignment, involves transferring your rights and obligations as a tenant to a new tenant, who then takes over the lease from a specified date with the landlord’s consent. The process typically requires a formal deed of assignment, careful review of lease terms, and agreement between all parties on responsibilities, costs, and compliance with any legal requirements. This article explains how to transfer a commercial lease and what each party needs to consider.
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.
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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.
However, achieving a complete release from lease obligations is not always straightforward. In some circumstances, particularly where retail legislation does not mandate a full release, landlords may require the outgoing tenant to remain partially liable under the lease even after assignment. This is known as “remaining on the hook”; effectively, this would mean that the outgoing tenant could still remain on the hook for the incoming tenant’s defaults.
If the landlord insists on this continued liability, you should protect yourself by obtaining comprehensive indemnities and guarantees from the incoming tenant. These legal protections ensure that if the new tenant defaults on their obligations, they are responsible for compensating you for any losses you suffer as a result of being called upon by the landlord.
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.
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3. 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.
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, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced leasing lawyers help businesses across industries manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.
Frequently Asked Questions
No. You must document the transfer in a deed of assignment to formally transfer rights and obligations. Without it, the original tenant remains liable under the lease.
Yes. From the assignment date, the assignee must comply with all lease terms, including rent, repairs and outgoings, as if they were the original tenant.
The outgoing tenant is usually released from future obligations once the assignment takes effect, unless there are existing breaches or the landlord requires ongoing liability under the lease.
Retail lease transfers often require a disclosure statement with key lease details. If the tenant fails to provide it correctly, the incoming tenant may delay rent, claim compensation, or terminate the lease.
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