Things to consider when assigning a commercial lease

A tenant of a small industrial premises came to a private arrangement to sell her business, without taking legal advice.  She then engaged a lawyer who advised her that she would need to arrange with the landlord to assign her lease to the buyer before settlement could take place. 

The landlord required various things before they would agree to sign the Deed of Assignment of Lease, including confirmation that the buyer had the financial means to service the rental owing under the lease.  This process ended up costing the tenant a lot of money on legal fees and led to a delay in settlement of the business sale in order for the Deed of Assignment to be signed.

When selling your business, if you operate from leased premises then you will need to ensure that you can assign your lease as part of the sale. 

You may also choose to assign a lease midway through a term if you are winding up your business or no longer need the space.

Deed of Assignment of Lease

An assignment of lease involves the assignee (new tenant) agreeing to take on all responsibilities and obligations in relation to the lease from the assignor (original tenant). The transfer is for the remainder of the lease term.  This is recorded in a Deed of Assignment of Lease.

Landlord’s Consent

In order to assign the lease the assignor (original tenant) will first need the landlord’s consent.  The landlord will likely require information on the assignee such as details of their financial background.  The landlord is entitled to request this information to ensure that the assignee will be able to meet their obligations under the lease and therefore ensure the landlord is not in a worse position than when they leased the property to the original tenant.

You cannot settle a sale of a business where there is a lease in place, without the landlord’s consent.  To do so would be a breach of lease.

Assignor’s liability continues

The assignment of lease terminates the assignor’s right to possession of the premises.

However, it is important to bear in mind that the standard Deed of Assignment of Lease provides that the original tenant still has the ultimate responsibility under the lease if the new tenant breaches the lease.  That ultimate liability continues until the end of the current lease term. This also applies to the original guarantors.  This can be modified within the Deed of Assignment of Lease or negotiated otherwise (if consented to by the landlord) but generally landlords will not consent to this.

.Important considerations if you intend to assign a lease

• Ensure the headlease allows for assignment and what those provisions say;
• Ensure you have a Deed of Lease in place.  You cannot assign an Agreement to Lease;
• Seeking landlord’s consent for assignment (this cannot be unreasonably withheld) as above;
• Being able to demonstrate to the landlord that the proposed assignee is respectable and is financially capable to meet the obligations under the lease as above;
• Being otherwise up to date with rent payments and not in breach of the lease;
• Whether the landlord requires a bank or rental bond, or personal guarantee from the proposed assignee; and
• Whether the assignor is capable of paying the legal fees in relation to the assignment and/or what the lease says about legal fees.

Note that this process is separate and distinct from the subleasing process, where in a sublease the tenant transfers part of their existing lease to a third party. The original tenant retains an interest in the premises and retains responsibility for all lease obligations.

If you are considering selling your business, moving premises, downsizing premises or winding up your business, it is very important to consider the position regarding assigning your lease.  It is recommended that you take legal advice before signing any documentation relating to your lease.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.

Laurie Pallett and Raiyan Azmi