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
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.
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