Lease assignments can either run smoothly, or they can be frustrating and costly processes for landlords, tenants and assignees.
So how can you make your life easier?
Consider these tips for a smoother lease assignment process:
Tip 1: Read the assignment clauses of the lease carefully
This one sounds obvious – but it is an important starting point that tenants sometimes miss. If a tenant is considering seeking the landlord’s consent to an assignment of the lease, read the clauses in the lease about assignments carefully.
The assignment clause often sets out:
- a process for obtaining the landlord’s consent to an assignment, which may include a specific minimum timeframe that the landlord will need, in order to consider the tenant’s application
- the information the tenant needs to provide to the landlord about the proposed assignee. For example, the lease may require the assignee to compile statements of assets and liabilities (prepared by the assignee or the assignee’s accountant), business references, personal references etc
- the criteria a proposed assignee needs to meet before the landlord will consent to the assignment. For example, the lease may provide:
- that the proposed assignee must have equal or greater financial means as compared to the existing tenant. This type of clause is often included to give landlords comfort that an assignee will have similar capacity to meet the financial and other obligations under the lease as the tenant
- the assignee must only use the premises for the permitted use listed in the lease. So if the permitted use listed in the lease is a pizza shop, and the assignee intends to use it as a nail salon, the proposed assignment will not meet the lease requirements.
- the form of security for performance the assignee will need to provide, if consent to the assignment is given. For example, a lease may require:
- a bank guarantee from the assignee
- a security deposit from the assignee
- personal guarantees from individuals related to the assignee, such as the directors of the assignee if the assignee is a company; and/or
- a guarantee by a company related to the assignee, such as the parent company of the assignee.
As a preliminary step, tenants should ask the assignee to commence compiling the financial information and references required under the lease assignment clause.
Tip 2: Ask about the landlord’s assignment application process early
Experienced landlords often have an application form to complete and an internal application process for proposed lease assignments. Tenants should ask the landlord (or the landlord’s property manager) about what the landlord’s application process involves, and whether the landlord has an application form that needs to be completed. The application form will often also set out the information the landlord needs from the assignee, in order to process the application.
Usually leases provide that tenants are responsible for the landlord’s costs of a proposed assignment, whether or not the assignment proceeds. Tenants may want to enquire about the landlord’s estimated costs (including the landlord’s legal fees), when asking about the landlord’s application process.
Experienced landlords often request a meeting with the proposed assignee before any formal application for consent to assignment is processed.
Tip 3: Consider any Retail Shop Leases Act 1994 (Qld) disclosure obligations before formally seeking the landlord’s consent
If the lease is a retail shop lease under the Retail Shop Leases Act 1994 (Qld), the tenant has an obligation to give the assignee a disclosure statement and a copy of the current lease (assignor disclosure statement), at least 7 days before the earlier of:
- if the assignment of the lease relates to the sale of the tenant’s business to the assignee, the day the assignee enters into the business sale agreement; and
- the day the landlord is asked to consent to the assignment.[i]
The assignee also has an obligation to give an assignee disclosure statement to the tenant, before the landlord is asked to consent to the assignment.[ii]
When asking the landlord to consent to the assignment, the tenant must give a copy of the assignor disclosure statement to the landlord.[iii]
If a tenant is unsure about whether or not the existing lease is a retail shop lease under the Retail Shop Leases Act 1994 (Qld), the tenant should seek legal advice early.
Tip 4: Formally ask for the landlord’s consent to the proposed assignment
The tenant should formally seek the landlord’s consent to the proposed assignment. The request should be made in the way the lease requires, which is usually in writing, addressed to the landlord or the landlord’s property manager.
To ensure a streamlined process, this formal request for consent to assignment should attach:
- the completed landlord’s assignment application form mentioned in Tip 2 (if applicable)
- the information about the assignee and references mentioned in Tip 1 and Tip 2
- if the lease is a retail shop lease under the Retail Shop Leases Act 1994 (Qld), copies of the disclosure statements mentioned in Tip 3
- any other information the lease requires for a proposed assignment.
Tip 5: Allow time for the landlord to consider the application
Tenants often enter into business sale agreements with a proposed assignee that do not factor in sufficient time for seeking and obtaining the landlord’s consent to the assignment.
Leases often include clauses that say the landlord must be allowed a certain number of days to consider an assignment application, once the tenant and assignee have provided all information required to process the application. Tenants should factor this timeframe into any business sale contract with the assignee.
If the lease is a retail shop lease under the Retail Shop Leases Act 1994 (Qld), and if the landlord has not decided the application for consent to assignment within one month after the application was made and full particulars of the proposed assignment were given to the landlord, a retail tenancy dispute exists under the Retail Shop Leases Act 1994 (Qld). In those circumstances, either party may apply to the Queensland Civil and Administration Tribunal for resolution of the dispute.
Tip 6: If a retail shop lease, allow sufficient time for further disclosure under the Retail Shop Leases Act 1994 (Qld)
If the landlord decides that it will consent to the assignment, and the lease is a retail shop lease under the Retail Shop Leases Act 1994 (Qld), there are additional disclosure obligations to comply with before the assignment of lease is entered into. Namely:
- at least seven days before the assignment is entered into, the landlord must give the assignee a disclosure statement and a copy of the lease;[iv] and
Tip 7: The assignee should arrange the lease security and insurances early
Once the landlord has confirmed it will consent to the assignment (which is often subject to certain conditions), the landlord or its lawyers will then usually prepare a draft deed of consent to assignment of the lease.
The draft deed will set out the conditions precedent to the landlord’s consent. The conditions precedent often include:
- the assignee providing its security for performance required under the lease, such as a bank guarantee or security deposit If a bank guarantee is required under the lease, assignees should approach their bank early. Experienced landlords often have information sheets about what the bank guarantee needs to include. Assignees should obtain that information and provide it to the assignee’s bank. A handy tip is to ask the bank for a draft of the bank guarantee first, and provide the draft to the landlord for approval Obtaining a bank guarantee can take days or weeks, depending on the assignee’s financial position and its arrangements with its bank. Assignees should factor their bank’s timeframes into the assignment process
- the assignee providing insurance certificates of currency. Assignees should check the lease insurance requirements carefully. Experienced landlords often have information sheets about what the insurance certificates need to cover. Assignees should obtain that information, and provide it to their insurer. This will assist in getting the correct insurances and obtaining certificates of currency that comply with the lease requirements.
Failure by the tenant and assignee to satisfy each of the conditions precedent in the deed of consent to assignment could mean that the landlord’s consent to the assignment has not been obtained. This could hold up settlement of the sale of the business by the tenant to the assignee, or cause the business sale to fall over.
Avoid some of the headaches associated with lease assignments by following the above tips!