When a company signs a commercial or retail lease, the company will be bound to the lease. This means that, if you want to substantially restructure your company after signing a lease, this may trigger an assignment or transfer of the lease from the original company to the restructured company. In this article, we explain:
- when a company restructure will trigger an assignment of lease;
- how you can obtain the consent of the landlord; and
- what documentation you need to record that the restructured company is bound to the lease.
What is an Assignment of Lease?
An assignment of lease occurs when you transfer the lease (and therefore, your obligations under the lease) to a new tenant. Once you have assigned the lease, the new tenant has the right to use the property and is bound by the lease.
When Will a Restructure Trigger an Assignment of Lease?
A company is a distinct legal entity. Therefore, when a company signs a lease, its directors and shareholders are not bound by the lease unless they give personal guarantees. A company restructure will typically trigger an assignment of lease if it includes a change:
- of ownership because existing shares will be bought or sold;
- of ownership because new shares will be issued; or
- in control because the shareholders or directors with voting rights have changed.
It must also be a change of more than 50% to trigger the assignment clause of the lease. This means, for example, more than 50% of the company’s shares being sold to a new shareholder. This rule usually applies to all private limited liability (Pty Ltd) companies, but not public companies listed on the Australian Stock Exchange.
How Do You Obtain the Lessor’s Consent?
Once you have a proposed restructure, you should have a lawyer review your lease to determine if you need the landlord’s consent.
If you need consent, you will then write to the landlord to seek their consent in writing. You may also need to provide further information such as:
- evidence of the financial resources of the restructured company; or
- the business skills of the incoming directors, depending on the specific requirements of your lease.
Additionally, the landlord or their solicitor should review the information you provide and inform you whether:
- they will grant their consent to the restructure; and
- their consent is subject to certain conditions being met.
However, if you proceed without getting the landlord’s consent, the landlord may have the right to terminate the lease early, force you to vacate the premises and sue you for any damage.
What Are the Common Conditions of a Landlord’s Consent?
The common conditions of consent include that the restructured company:
- agrees to comply with the obligations of the original company as though the restructured company was the original tenant on the lease;
- assumes all liabilities and responsibilities of the original company; and
- replaces or provides additional security for compliance with the lease, such as a:
- bank guarantee;
- security deposit; or
- personal guarantees from the company directors.
How Long Does the Landlord Have to Decide?
If the lease is commercial, it should explain how long the landlord has to consider an assignment request. The lease could provide a specific timeframe (e.g. 14 days) or generally state that the landlord must consider the request within a “reasonable” time.
However, if the lease is retail, the retail lease legislation in each state and territory (except for Queensland) will provide a specific timeframe within which the landlord must respond. If they don’t respond within this timeframe, consent is said to be granted. The timeframes for each state and territory (except for Queensland) are as follows:
|State or Territory||Time Frame|
|New South Wales||28 days|
|Australian Capital Territory||28 days|
|Western Australia||28 days|
|Northern Territory||42 days|
|South Australia||42 days|
Can the Landlord Refuse to Provide Consent?
If the lease is commercial, the landlord may refuse to provide their consent if:
- you do not provide the further information they request;
- the further information is not satisfactory;
- you do not agree with the conditions of their consent;
- you refuse to sign the assignment documentation; or
- you refuse to pay the landlord’s costs.
If the lease is retail, the retail lease legislation may set out the only circumstances in which the landlord may refuse to provide consent. For example, in New South Wales, the lessor may refuse to provide consent only if the:
- restructured company will change the permitted use of the premises;
- restructured company has inferior financial resources or retailing skills; or
- original company has not complied with the procedure for obtaining the landlord’s consent.
What Documentation Do You Need?
The conditions of the landlord granting their consent are usually found in a deed of consent which is prepared by the landlord or their solicitor. Once the deed of consent has been finalised, the parties should enter into a deed of assignment which will assign the lease from the original company to the restructured company. The deed of assignment should also be accompanied by the government form if the parties intend to register the assignment at the land titles office (or equivalent) in the premises’ state or territory.
In some cases, the landlord or their solicitor may combine the deed of consent with the deed of assignment (called a deed of consent to assignment of lease) so that there is only one document instead of two.
If the lease is a retail lease (rather than commercial), the original company will also need to provide the restructured company with an updated disclosure statement. This disclosure statement should contain the original information provided by the landlord when the company entered into the lease, along with any changes that have occurred since.
Are There Any Ancillary Documents?
If there are any ancillary documents to the lease, such as a car park licence or incentive deed, you should review these documents to determine if you can transfer the rights and obligations of the original company to the restructured company. For example, it is common for a car park licence to be personal to the original company and non-transferable. Accordingly, the restructured company would need to enter into a new car park licence with the landlord.
You should also review the documents to check if there will be any negative consequences to the assignment. For example, an incentive deed may require the original company to repay any incentive received because the lease is assigned. This incentive may have been a contribution to fit-out works or a rent-free period and could be costly to the original company if it needs to be repaid.
What Are the Costs?
Each party to the assignment of the lease (i.e. the landlord, original company and restructured company) are likely to incur costs as a result of the assignment. These costs may include:
- legal costs for considering the request for consent or drafting, reviewing or negotiating the assignment documentation;
- registration fees (if you will register the assignment of lease); and
- mortgagee’s consent fees (if the landlord has a mortgage over the property).
If the lease is commercial, it is ideal if the lease states that each party is responsible for their own costs. However, it is common for these costs to be passed onto the original company unless the lease says otherwise.
However, if the lease is retail, the retail lease legislation in each state and territory will explain which party is responsible for these costs. For example:
|State or Territory||Party Responsible for Costs|
|New South Wales||The original company may have to pay the reasonable costs of the landlord.|
|Australian Capital Territory||Each party is responsible for their own costs. However, if one party requires registration, that party is responsible for the registration fees.|
|South Australia||The original company will only have to pay any costs not exceeding the stamp duty and registration, as well as half of the other preparatory costs. This includes the mortgagee’s consent fees.|
Before commencing any company restructure, you must be aware of, and follow, the process for seeking and obtaining the consent of the landlord. This will ensure that you do not inadvertently breach your lease. Additionally, you should understand how long your landlord has to consider your request and in what circumstances they can refuse to consent.
Finally, consider the documents and costs involved. If you require assistance with assigning your lease as a result of a company restructure, get in touch with LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.
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