The Retail Shop Leases Amendment Act 2016 (Qld) (Amendment Act) received royal assent on 25 May 2016. Although the commencement date of the Amendment Act is yet to be announced, it creates a number of significant changes to the Retail Shop Leases Act 2014 (Qld) (Act).
Of particular note to sellers of retail businesses seeking to assign a retail shop lease is the amendment to section 50A of the Act.
For many retail businesses, the lease of business premises is both a significant factor for business success and a major expense. For businesses operated by a company, it is common practice for landlords to obtain personal guarantees from the directors of the business owner to secure the performance of the company’s obligations under the lease.
In many cases upon the sale of a retail business, the lease of the business premises is assigned to the buyer rather than a separate lease being entered into between the landlord and the incoming lessee.
The major consideration for the seller is what happens to their obligations under the retail shop lease when the lease is assigned.
- THE CURRENT RETAIL SHOP LEASES ACT
Generally, a commercial landlord is not obliged to release an assigning party from its obligations under a lease if that lease is assigned to a third party.
Since 2006, section 50A of the current Retail Shop Leases Act 1994 (Qld) has altered this default position by operating to release the assignor from any liability under the lease to which they would otherwise have been subject if there were any default by the assignee.
This statutory release of the assignor under a retail shop lease applies only if all parties to the assignment had fully complied with their disclosure obligations under the Act.
The important omission from this section of the Act is any mention of a guarantor under the assigned lease. Since a high proportion of retail shop leases include a personal guarantee, the personal liability of a guarantor continues after an assignment of the lease to a third party unless the landlord specifically releases the guarantor from their obligations.
As a handy fallback strategy should the assignee become insolvent, many landlords are unwilling to release a guarantor upon assignment of a lease even if specifically requested.
This creates a state of continuing liability for a former business owner under a lease over which they no longer have any control. In some cases, this liability can continue for several years after the business has been sold.
- WHAT HAS CHANGED?
The new section 50A under the Act provides for the release of both the assignor and any guarantor of the assignor from liability under the lease resulting from a default by the assignee.
The new section will apply to assignments entered into after the commencement of the Retail Shop Leases Amendment Act 2016 (Qld), the date for which is yet to be proclaimed.
Importantly, the new section 50A still requires the parties to comply with the disclosure obligations required by sections 22B – 22E of the Act. These obligations are also altered by the Amendment Act to allow, among other things, for an assignee to waive the mandatory 7 day disclosure period.
For assignment transactions that are in progress at the time of the Amendment Act’s commencement, compliance with the previous disclosure obligations will be sufficient to release a guarantor under the new section 50A.
- BENEFIT TO SELLERS OF RETAIL BUSINESSES
The obvious benefit to sellers of retail businesses under the changes to section 50A of the Act is that after its commencement, business owners can be assured that their personal liability under a guarantee will cease when their lease is assigned to a third party buyer.
To avoid surprises and ensure that this release is effective, sellers should take special care to ensure that all parties to the assignment process are fully compliant with the disclosure requirements under the Act, and that all disclosure statements are correctly completed. Failure to do so could result in the assignor and guarantor’s liability continuing after the lease assignment.