In most leases the tenant has the right to assign the lease with the landlord's consent. The landlord may impose conditions for its consent. It is common for one of these conditions to be that the parties show the landlord that the proposed new tenant is respectable and financially sound with experience in and a good reputation for conducting the business permitted under the lease, or words to a similar effect.
Usually landlords would have a look at the proposed new tenant's business experience. If the proposed new tenant puts up the necessary bank guarantee/directors' guarantee, has some relevant experience and the previous tenant is not released from the lease obligations, landlords would usually consent to the lease assignment.
The tenant owned a large restaurant in Manly. With 18 months (and two three year options) left to run on the lease the tenant attempted to sell its business. The shareholders of the purchaser company had considerable business experience but no experience in managing or operating a restaurant business. The landlord refused its consent to the assignment of the lease on the basis that the experience and retailing skills of the shareholders of the purchaser (proposed new tenant) were less than that of the current tenant.
The lease was for a retail shop under the NSW legislation. The Retail Leases Act 1994 (NSW) provides that a landlord can withhold its consent to an assignment if the proposed assignee has financial resources or retailing skills that are inferior to those of the current tenant. The Queensland Retail Shop Leases Act 1994 does not contain a similar provision but the Victorian Retail Leases Act provides a landlord can refuse consent if the landlord considers the assignee doesn't have sufficient "business experience to meet the obligations of the lease".
The NSW Supreme Court held that the landlord was legally justified to withhold its consent on the basis that the purchaser's retailing skills were inferior to those of the tenant. The Court concluded that there was no requirement for the businesses of the tenant and purchaser to be identical but they should be sufficiently similar to permit ready comparison of the retailing skills involved.
This in turn stifled attempts by the tenant to sell the business. This case sounds a warning to tenants and prospective business purchasers that transfer of a lease to a business purchaser is not an automatic process.
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.