Assignment of Retail Lease – A Buyer’s Perspective

So, you have signed a Contract to buy a business which operates out of retail shop premises.  As part of the purchase, arrangements must be made for the Lease to be assigned to you.  So what is involved in this process?

The first thing to note is that it is neither simple nor a “given” that the Lease will or must be assigned to you.  Every Lease has in it a clause whereby the existing tenant (assignor) must seek and obtain the landlord’s consent to any Assignment of Lease. Whilst the landlord cannot unreasonably refuse to give its consent, it is entitled to be satisfied as to the bona fides of the incoming tenant (assignee).

The landlord is entitled to ask questions of you.  It is entitled to ask about your financial soundness, your business experience/acumen in operating or conducting a business of this nature,  seek references as to your good character and reputation both personal and financial and impose conditions on its consent (such as you paying a bond/bank guarantee, providing directors guarantees if you are buying in the name of a company, etc.).  It is important that the landlord is notified as soon as possible after the Contract has been signed seeking its consent so that you can be made aware as quickly as possible what information it requires so that you can seek the landlord’s consent.

Also, under the Retail Shop Leases Act, there are certain requirements which must be fulfilled prior to the assignment.  You (the assignee), the seller of the business (the assignor) and the landlord, all must give Disclosure Statements as well as other documentation.  Also, the landlord will want you and the assignor to execute a Deed of Covenant of Consent to Assignment of Lease and to meet all its conditions before you are able to take occupation of the premises.

The problem we often find is that the assignor and assignee do not allow sufficient time for this process to play out.  In the buyer’s eagerness to buy the business or the seller’s eagerness to sell the business, the parties agree to a short settlement period of say 21 days which, whilst it may be sufficient for the sale of the business, may be insufficient time for all the t’s to be crossed and i’s to be dotted with respect to the Assignment of the Lease.  And if this procedure is not done correctly, it can have huge ramifications to you as the buyer of the business.

Case Study

We acted for a client who bought a business.  Neither the buyer nor the seller had legal representation.  The client handed over the purchase price and took over the business, but the landlord was never notified of the changeover, let alone ever asked to give its consent to the Assignment of the Lease.  This amounted to a breach of the terms of the Lease by the seller.  The landlord owed no duty at all to the buyer who was in the premises illegally.  The landlord was able to evict the buyer from the premises and it was only by us being able to negotiate a satisfactory resolution with the landlord was the buyer allowed to remain in the premises and conduct its business from those premises.

Often, the location from which a business operates is very important, if not vital to its success.  The old adage of having “location, location, location” can be very important to a business’s success or failure.  When buying a business do not overlook the importance of ensuring that the Lease is legally and properly assigned over to you, otherwise, you may find yourself in a world of pain.

If you are thinking of taking over premises, please do not hesitate to contact our Commercial Property Law Team. If you are planning on entering into a lease, we suggest you contact our lawyers to obtain advice.

Our team can be contacted on 07 3808 7777 or business@mclaughlinlawyers.com.au.