Assignment of leases – differences in perspective
|Services:||Real Estate & Construction|
|Industry Focus:||Real Estate & Construction|
|Date:||24 January 2018|
|Author:||Bill Burrough, Partner|
What you need to know
- There are numerous circumstances in which a tenant might to wish to assign its lease to another party, particularly where a tenant has signed up to a long-term lease.
- When such an assignment is contemplated, questions arise about whether or not the landlord’s consent will be required and what other obstacles might stand in the way of a tenant’s assignment being completed.
- It is prudent for tenants to conduct their lease negotiations with an eye on the possibility that they may wish to seek an assignment of their lease in future, and to carefully consider the steps they need to follow if and when the time comes to pursue an assignment.
The proposed assignment by tenants of their leases can lead to frustration, thwarted ambitions and unforeseen expense. Why, when so many assignments proceed without a hitch, should this be so?
In this article, I focus on the assignment of leases by tenants – not by landlords. A landlord might effectively assign its interest in a lease by selling the freehold or other reversionary interest or by granting a concurrent lease. Usually, the tenant’s consent to an assignment by the landlord is not required although a tenant might want to include certain safeguards in the lease in case this situation arises. This, however, will need to be left to a future article.
Here I want to focus on the consent, if any, which a tenant needs to obtain from its landlord should the tenant wish to assign its interest in a lease.
Is consent to assignment required?
At common law, no consent is required but I am yet to see a lease which does not expressly overrule the common law position.
Most leases will either prohibit assignments by the tenant or else make them conditional upon the tenant first obtaining the landlord’s consent. Under the common law there is nothing that prevents this, and there is also nothing requiring the landlord to act reasonably where consent is to be obtained.
Leases by their very nature are contracts under which a landlord agrees to grant exclusive possession of premises to a tenant for a certain period of time during which the tenant must pay rent to the landlord. Often this period of time will be quite long. When entering into the lease, it can be difficult for a tenant to foresee what will happen in the future. It may be that before the lease comes to an end, circumstances change and the tenant wants or needs to dispose of its interest in the lease.
It would be unusual therefore for a tenant in commercial negotiations to agree to a complete prohibition on assignment. Landlords who are in the business of leasing premises in a competitive environment recognise this and will generally agree to some limited right of assignment in favour of the tenant.
However, that is not to say that landlords welcome tenants assigning their leases. A lease is a contract between landlord and tenant. A proposed assignment of the tenant’s interest generally arises from an unilateral decision by the tenant in which the landlord has not been involved and which has no tangible benefit to the landlord.
This can cause frustration for the tenant even if the landlord has no actual objection to the assignment. The lease might require the tenant to obtain the landlord’s prior consent and to pay the landlord’s legal costs associated with the assignment. The landlord might want to see references for the assignee but may be in no hurry to review them. The landlord will almost certainly want the tenant and the assignee to enter into a deed so that the assignee directly contracts with the landlord to perform the tenant’s obligations. All of this takes time and even then there may be further delays in the landlord’s final approval and execution process. This can be particularly frustrating where a tenant has entered into a contact to sell its business which is conditional upon the assignment of the lease of the premises where the business is carried on.
Tenants can be even more frustrated where the landlord does not consent to the proposed assignment.
What does legislation say about consent to assignment?
Legislation has been enacted so that where consent to assignment is required under a lease, that consent must not be unreasonably withheld. There is different legislation in the various States, although the nature of this article does not allow me to go into detail in relation to the particular statutory provisions in each jurisdiction. However, where a reasonableness requirement does apply, landlords might seek to avoid it by:
- having a blanket prohibition on assignment but then providing that the tenant will not be in breach of that prohibition provided that the tenant complies with certain conditions
- requiring that the tenant, prior to any proposed assignment, first offers to surrender the lease to the landlord or transfer it on the same terms and conditions to the landlord or the landlord’s nominee
- providing that it shall not be unreasonable for the landlord to withhold consent in certain specified circumstances such as where the proposed assignment is to a named competitor of the landlord or an existing tenant.
Where by virtue of legislation or a lease provision, consent to a proposed assignment is not to be unreasonably withheld, the question arises as to what is or is not reasonable.
When is a landlord 'unreasonably' withholding consent?
As one would expect, there have been many cases on this question – too many to go through in this article. While each case is dependent upon the particular wording of the lease and relevant legislation, it is a question of fact, depending upon all the circumstances, whether the landlord’s consent to an assignment is being unreasonably withheld. In deciding this question of fact, courts have identified certain guiding principles including:
- the implied purpose of imposing a consent requirement is to protect the landlord from an undesirable tenant
- the onus of proving that consent has been unreasonably withheld is on the tenant
- a landlord is not entitled to refuse consent on grounds which have nothing whatsoever to do with the relationship of landlord and tenant in regard to the subject matter of the lease
- it is not necessary for the landlord to prove that the conclusions which led it to refuse consent were justified if they were conclusions which might be reached by a reasonable person in the circumstances.
Most tenants will want to avoid the cost of court proceedings, as will landlords. Furthermore, landlords will want to avoid the risk of damages being awarded against them where they have been found to have unreasonably refused consent and the tenant has suffered loss as a result. However, there will continue to be situations where, because of the particular circumstances, compromise cannot be reached.
Retail shop lease legislation has been enacted in an effort to make life easier for retail tenants. Again, there is different legislation in each of the States which I do not propose to address in detail here. However, taking New South Wales as an example, the Retail Leases Act 1994 provides that landlords can only refuse consent in very specific circumstances, with the principle grounds being where the proposed assignee:
- proposes to change how the shop is used
- has financial resources or retailing skills that are inferior to those of the current tenant
- fails to comply with the procedure set out in the Act for obtaining consent.
The second ground can be particularly problematic for a tenant who is perhaps very rich or a world renowned chef!
- have particular regard to the assignment provisions in negotiating a lease bearing in mind that circumstances may change during the term
- where assignment is required, review the lease provisions and relevant legislation carefully noting that a particular statutory process may be required where the premises are a retail shop
- not take it for granted that the landlord will consent to a proposed assignment or act expeditiously, especially if the tenant is remiss in providing the landlord with what it needs to make an informed decision.
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