| Focus: | Statutory regime around assignments of retail leases |
| Services: | Property & Projects |
| Industry Focus: | Property |
A tenant's ability to assign a lease is essential for the success and continued operation of many businesses. This article looks at the statutory regime around assignments of retail leases, and provides some general information for tenants on framing a request for assignment and for landlords on how to effectively deal with a tenant's request.
Quite often an assignment will be associated with a sale of a business, a corporate restructure or a franchising arrangement. Generally, for commercial and industrial leases, the landlord and tenant will deal with the parameters and requirements of any proposed future assignment at the start of their relationship when the lease terms are being drafted. However, in a retail context, state-based legislation in most Australian jurisdictions imposes a framework on the commercial arrangements by setting out minimum standards and requirements for the assignment process.
The statutory provisions relating to retail leases in NSW
In New South Wales, under the Retail Leases Act 1994, landlords can only refuse consent in very specific circumstances, with the two principle grounds being:
- the proposed assignee intends to change how the shop is used, or
- the proposed assignee has financial resources or retailing skills that are inferior to those of the current tenant.
There have been a number of cases dealing with these grounds and how strictly they can be enforced. The first is relatively straightforward, that is, either the assignee is proposing another use or it is not. The second, however, requires careful consideration as there are certain consequences for landlords if they jump straight to an assessment of the grounds for refusal without considering the procedural requirements of the legislation.
Section 41 of the Retail Leases Act 1994 sets out the process that a tenant should follow in applying for consent to an assignment of its retail lease. Landlords need to be aware that the section requires, firstly, that the landlord must deal "expeditiously" with a request for consent and, secondly, that if the landlord has not granted or withheld consent within 28 days then there is a "deemed" consent to the assignment.
So before considering whether the proposed assignee has financial resources or retailing skills that are inferior to those of the proposed assignor, the landlord must consider what information it requires to properly assess the tenant's request.
Guidance from the Lockrey case
The case of Lockrey v Historic Houses Trust of New South Wales [2012] NSWCA 249 (Lockrey) provides a timely reminder to landlords of the steps needed to properly deal with a request for an assignment by a retail tenant.
The case considers section 41(a) of the Act which requires that:
It appears clear from the judgment that the tenant's request for consent does not actually need to be accompanied by information regarding the financial standing and business experience of the proposed assignee (although it is advisable for tenants to provide this information at the outset). The onus is on the landlord to request that information if it is not provided.
Further, when the landlord makes a request for information (either where none has been provided or where what has been provided is not sufficient), the onus is also on the landlord to articulate precisely what it "reasonably" requires to make its assessment.
On the basis of this decision, where a landlord is presented with a request for assignment, it will not be sufficient to simply respond that no financial or business information was provided or that the financial or business information provided is inadequate. The landlord must identify what information it requires, or face a deemed consent on expiry of the 28 day period.
Landlords should be careful to ensure that requests for further information/documentation are relatively specific in detailing the information required and, even before doing so, should consider whether the information they do propose to request is actually relevant to the assignee's current financial standing. A landlord who simply responds with a general request "for information on the proposed assignee's financial standing" may find themselves in trouble.
As a guide for landlords, the types of information that would be relevant are accounts, tax returns, asset and liability statements, trading references and other business testimonials for the assignee. In Lockrey, the landlord's request for a financial plan for future payment of rent was considered not relevant to the assignee's current financial standing.
It is also interesting to note that Lockrey suggests that a tenant may make multiple requests to assign the lease (even to the same proposed assignee) and the landlord must respond to each individual request, being mindful that a (new) 28 day period commences as soon as each request for assignment is made.
The position in Queensland
In Queensland, the Retail Shop Leases Act 1994 does not replicate the "deemed" consent time frame as it appears in the NSW legislation. In Queensland the terms of the lease usually specify the information which a tenant is required to provide to enable the landlord to assess a proposed assignee. The underlying requirement for a landlord to act reasonably, whilst not set out specifically in the Queensland legislation, would ordinarily apply.
In any event, the Queensland provisions do stipulate that a "retail tenancy dispute" exists if the landlord has not given an answer to the tenant within one month after the assignment request and the particulars are given to the landlord. That dispute can then be dealt with under the resolution provisions in the Act, including making an application to the Queensland Civil and Administrative Tribunal.
The position in the ACT
The Leases (Commercial and Retail) Act 2001 for the ACT is fairly similar to the NSW legislation. The tenant must first provide a copy of the disclosure statement to the proposed assignee and the tenant will then be permitted to make a request to the landlord for consent to an assignment.
Under section 96 of the ACT legislation, the landlord has just 14 days to request further information on the proposed assignee, and that provision is quite prescriptive about what documentation/information can be requested. As with the NSW legislation, section 99 of the ACT legislation imposes a deemed consent if the landlord has not responded within 28 days of the tenant's request, or within 21 days after receiving any further information that the landlord has requested.
Section 100 stipulates that the landlord may refuse consent "only if it is reasonable in all the circumstances to do so". That section goes on to set out some circumstances in which it will be reasonable to refuse consent, including where the prospective assignee does not have the financial resources and/or skills to run the business, where the business conducted by the prospective assignee will not be compatible with other tenants in the building or where the existing tenant has failed to rectify a breach of the lease.
Key considerations
Tips for landlords
- Landlords should treat each individual request for assignment of a retail lease with a degree of urgency
- Landlords should consider what information they require to assess the financial resources or retailing skills of the assignee (and consider whether their requirements are "reasonable" in the circumstances)
- Landlords should be clear in their communications with the tenant/proposed assignee and specify precisely what documents or information they need.
Tips for tenants
- A request for assignment must be made in writing to the landlord and served in accordance with the requirements of the lease
- The tenant, in making the request, should provide the landlord with some documentation to substantiate the financial resources and retailing skills of the proposed assignee
- The tenant should check whether it is a requirement to provide the proposed assignee with a copy of the lease disclosure statement (and what rights they have under the relevant legislation to request a copy from the landlord).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
