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:
- 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
- the tenant is proposing to exit the lease and has found a party who will take on the existing lease.
This article examines 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.
Preliminary Steps to Transfer a Commercial Lease
As soon as an assignment is proposed, the first steps are:
- a review of the existing lease to identify if the lease can be assigned;
- identification of the requirements of landlord’s consent upon assignment; and
- correspondence with the landlord or agent as to consent and approval of the proposed assignee under the lease. This will usually involve the proposed new tenant providing their financial and business references to the landlord.
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 the following terms:
- the landlord confirms their consent to the transfer of lease;
- the tenant agrees to transfer their entire interest in the lease to the assignee from a specific date (the assignment date); and
- the 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.
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;
- the assignee can comply with the obligations of the lease. This will often involve an assessment of the assignee as a tenant. The landlord will thoroughly examine information before confirming their consent to the transfer. This might include financial statements, business history and professional references; and
- there is 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 deed of assignment usually requires the assignee to give the relevant security and guarantees.
The Outgoing Tenant
The tenant’s key concern is to be released from their 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 isn’t 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 the tenant to remember that they are bound to the terms of the lease until the transfer of commercial lease is formalised through the deed of assignment. Accordingly, the tenant should continue to comply with their obligations under the lease until the assignment date.
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 as if they were initially the tenant in the lease. These obligations may include the provision of security and a personal guarantee.
Transferring a Retail Lease
If the lease being transferred 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 agreed upon during the term of the lease.
The disclosure statement outlines the vital information that the assignee needs to know, including the:
- annual base rent under the lease;
- estimated outgoings payable under the lease;
- term of the lease and any options to renew;
- estimated commencement date of the lease;
- details of the premises; and
- permitted use of the premises.
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. Generally, this is within 14 days from the date of the request.
The disclosure statement requirements differ between the states and territories. For example:
- in New South Wales, the assignee must receive the disclosure statement at least seven days before the date of the transfer; and
- in Victoria and Queensland, the assignee must receive the disclosure statement at least seven days before the assignor requests the landlord’s consent.
The consequences of the failure 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.
Additionally, the transfer of a lease may also lead to stamp duty implications.
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, get in touch with LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.
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