Assigning a commercial property lease to another business

There are many reasons why a tenant might wish to exit a commercial lease some time before the lease is due to end. It may be that the premises are no longer suitable because of business expansion, contraction, or altered plans.

One possible option is assigning the lease. Assignment of a commercial property lease means transferring the lease to another business so that they become the new tenant.

An assignment will require the landlord’s consent, but normally the landlord cannot unreasonably withhold their agreement.

Issues with a landlord’s consent to assignment

(i) Unreasonable refusal of landlord consent

The NSW Conveyancing Act (1919) suggests that where an assignment of a lease is proposed, the landlord’s consent should not be unreasonably withheld. If the assignment is refused, the question is whether it has been withheld unreasonably.

There is no definitive rule as to what is unreasonable, but it seems that a landlord needs to have a legitimate commercial reason for refusing to consent to a proposed assignment and not be driven by some other ulterior motive.

(ii) A tenant’s obligation to request an assignment

Notwithstanding the landlord’s responsibility to act reasonably in granting an assignment, the tenant cannot assume they can simply proceed without involving the landlord. In Tamsco Ltd v Franklins Ltd (2001), the NSW Supreme Court emphasised the importance of the tenant actually having to request the landlord’s consent even where ‘the assignee is a person to whom there could be no reasonable objection’.

Ignoring the need for landlord consent would constitute a breach of the lease terms and may entitle the landlord to terminate the lease and re-take possession of the premises.

(iii) Implied landlord consent to an assignment

In some circumstances, where an assignee is in possession of the premises in the full knowledge of the landlord, consent might be found even if the documentation was never completed.

In the NSW Court of Appeal case Chamberlain Group Pty Ltd v Kids for Life Academy Pty Ltd (2015), the landlord knew that the assignee was already occupying the premises and did not raise any objection to the arrangement while continuing to collect rent from the assignee.

Where landlords are silent on whether they have consented to an assignment, their conduct becomes relevant. Courts have decided that some landlords by virtue of their conduct, have impliedly consented to an assignment.

What does it mean?

Generally speaking, a tenant will be permitted to assign their leasehold interest provided they obtain the prior consent of their landlord or otherwise satisfy the criteria prescribed in the lease.

Difficulties and consequently disputes may arise, however, where the tenant has complied with all the required stipulations, and the landlord’s consent is refused. If a landlord behaves unreasonably in refusing their consent, the NSW Supreme Court may have to be called upon to determine whether consent has been unreasonably withheld contrary to s133B of the Conveyancing Act (1919) (NSW). Where an assignment of a lease is proposed requiring a landlord’s consent, this must not be unreasonably withheld.

Complications can also arise if the assignee, the incoming tenant, fails to comply with the obligations under the lease. On assignment, it needs to be clear to what extent the original tenant might be held responsible for a breach of the lease by the new tenant.

For their part, tenants must ensure that they have properly communicated with the landlord about the proposed assignment, preferably in writing, and have served the request in accordance with the lease provisions, including the notice periods. A tenant will not be released from their obligations unless there is an express agreement, either in the lease agreement or by negotiation for inclusion in the deed of consent.

As for the landlord, when in receipt of an assignment request, the landlord needs to ensure that they are not taken to have impliedly consented by their conduct. The landlord should promptly acknowledge receipt and request financial and other relevant information that has a direct impact on their willingness to provide or withhold consent to an assignee.

If the lease is for retail premises, the Retail Leases Act sets out the procedure to be followed in relation to assignments and the circumstances in which a landlord can withhold consent to an assignment. If leasing a retail outlet, for example, an assignment of a lease will require particular disclosure requirements within strict time periods.

Alternative ways to exit a commercial lease

Assignment is not the only way to alter a tenant’s status early.  Depending on the circumstances, it may not be the best option. Alternatives include:

• Use a break clause:  some leases include a break clause offering both parties to end the lease in certain circumstances. Any time limits outlined regarding notice must be followed.
• Negotiation: even if there is no break clause, the landlord may be open to exiting the lease early. This may involve some cost but could allow a clean break with no ongoing liabilities. Legal advice is recommended to confirm this is indeed the case.

A further option may be sub-letting the premises. If the contract allows it, a tenant might take on the role of landlord by finding and leasing the property to a new tenant. Rent from this tenant can be used to cover obligations to the head landlord, but it will require taking on managing the property with the new sub-tenant directly.

Contact our Commercial Property Leasing and Property Dispute Lawyers in Sydney, NSW

Lease assignment can be an effective way for tenants to alter their relationship with their landlord. If you want to exit your lease early, it is advisable to obtain independent legal advice from an experienced commercial property lawyer before taking any action. Contracting a solicitor early means that appropriate advice is obtained at the outset regarding any key considerations and potential pitfalls. At Szabo & Associates Solicitors, we have many years of experience in all manner of commercial property law matters, including disputes. Please contact us on 02 9281 5088 or fill in the online contact form.