If you are selling or purchasing a business and the business is operated at a premises under a lease, the transaction would necessarily include assignment of the lease (also known as transfer of lease) from the seller (being the assignor) to the purchaser (being the assignee).
As a seller, it is important to revisit the terms of the existing lease of the premises to identify whether the lease can be assigned and the terms and conditions relating to the assignment of the lease.
Typically, the seller is not permitted to assign the lease except with the landlord’s consent and there are requirements that must be complied with before the landlord’s consent will be granted, including but not limited to the following:
(a) specific notice requirements;
(b) credentials of the purchaser are satisfactory to the landlord;
(c) the assignor has complied with all terms in the lease and there is no breach or unremedied breach of the lease;
(d) the landlord’s reasonable costs in relation to the granting of its consent is paid. (This is usually up for negotiations between the assignor and the assignee as to who is to pay for this cost or how to share the cost;
(e) the assignor, guarantor, assignee and incoming guarantor entering into a deed of consent on terms satisfactory to the landlord;
(f) the assignee providing security reasonably required by the landlord.
Some sellers may prefer to avoid having a conversation with the landlord, especially if the relationship with the landlord is difficult. However, we do not recommend ignoring the requirements for the landlord’s consent as parting with possession of the premises upon a sale of a business without the landlord’s consent would constitute a breach of the lease, and will entitle the landlord to terminate the lease and retake possession of the premises.
If the lease is approaching expiry with few or no options or has expired, we suggest the seller finalises any renewal of lease or new lease to extend the lease term or amendment of lease to include further options, before listing the business for sale. A longer lease term is usually more attractive to buyers as it provides them with stability and certainty of having a premises for a sufficient term. By finalising any new lease, renewals or additional further options, a seller can also avoid the contract of sale of business being dependent or conditional upon the landlord’s approval to extend the lease term or provide further option terms, which is usually in the absolute discretion of the landlord and not within the control of the seller.
It is the assignor/seller who approaches and seeks the landlord’s consent, although the assignee/purchaser can be included in the negotiation process.
As a buyer, it is important that the terms of the lease be carefully reviewed and that a thorough due diligence be conducted to ensure:
- the premises is suitable for your proposed business and has the appropriate approvals or certification for its use;
- there is no unsatisfied condition under the lease;
- you are able to meet the obligations as the tenant under the lease; and
- it is commercially viable for you to conduct the business at the premises.
A buyer should ensure that it has documentary evidence to substantiate its experience in conducting the relevant business and financial ability to meet the obligations under the lease. These documentary evidence could be in the form of the buyer’s financial statement, asset and liabilities statement, business plan, qualifications in conducting the particular business (if applicable) and references. Typically, the landlord will require the buyer to furnish this evidence before considering any request from the seller to assign the lease.
A buyer should also make enquiries and ensure that there is no unremedied breach of the lease by the seller as at the assignment date. This is because the assignee steps into the shoes of the tenant and takes on all liabilities under the lease from the commencement date, once the lease is assigned. A solution to this would be to limit the assignee’s liabilities under the lease to those from the assignment date. This limitation of liability and even an acknowledgement that there are no liabilities or breaches should be included in the deed of consent to assignment, which is to be entered into by the assignor, assignee and the landlord.
On the other hand, a seller would want to ensure that it is released from any claims or liabilities under the lease from the assignment date, provided that there is no existing unremedied breach of the lease. This release of liabilities should be included in the deed of consent to assignment.
Retail Shop Leases
If the premises is a retail premises as defined in the relevant legislation of the state, there may be specific terms which are implied in the lease pursuant to the relevant legislation and there may be disclosure obligations imposed on the respective parties in relation to an assignment of lease. You should seek professional legal advice to ensure that implied terms under the relevant legislation and disclosure obligations are complied with.
We have extensive experience in the conduct of sale and purchase of businesses and we are able to assist in the pre-contractual review and negotiation, legal due diligence of the business, the transfer of the lease and any other supply and service contracts up until the completion of the sale or purchase of the business.
If you wish to discuss or require assistance with your business’ sale or purchase, please do not hesitate to contact the writer.