Press enter to see results or esc to cancel.

Assignments of Lease – Avoiding the Pitfalls

In brief

Disputes between landlords and tenants over assignment of lease can be costly but are easily avoided.

Disputes over assignments of lease

Disputes over assignments of lease can result in:

  • tenants losing an opportunity to sell a business;
  • landlords defending costly claims that a tenant was entitled to assign the lease without consent because the landlord unreasonably delayed consent. Costs may not follow the result if the claim is made under the Retail Leases Act through the Administrative Decisions Tribunal;  and,
  • an underperforming tenant remaining in a building until the issue is resolved.

A typical assignment of lease dispute

A tenant wishes to assign its lease. The lease provides that the tenant must obtain the consent of the landlord and that the landlord must not unreasonably withhold consent.

There is a flurry of correspondence from the tenant to the landlord which tells the landlord that the tenant is going to assign the lease.

The landlord asks the tenant for financial information about the proposed assignee. Some sketchy figures are provided. The landlord asks the tenant for additional financial information about the proposed assignee. The tenant tells the landlord that the assignee must provide that information. The landlord waits for the information.

The assignee writes to the landlord requesting consent to the assignment and asking for it to be provided ‘forthwith’. The landlord responds to the tenant, again requesting the additional financial information.

The tenant writes to the landlord stating that the landlord is unreasonably withholding consent to the assignment and that the tenant is now free to assign the lease without consent. The tenant assigns the lease.

The landlord issues notices of breach of lease to the tenant. The parties end up in Court. The Court holds in favour of the landlord.

This account is based on the scenario in Tamsco Ltd v Franklins Ltd [2001] NSWSC 1205.

Three things to do to avoid this scenario

A review of the case law shows that there are three critical points when dealing with an assignment of lease. These traps are common.  They also apply, to some degree, to a tenant’s request for the landlord’s consent to the grant of a sub-lease.

1.   Following the procedure specified in the lease.
The parties must follow the procedure for assignment that is specified in the lease. It is not enough for a tenant to notify the landlord either that an assignment is going to take place or that the tenant wants to assign the lease if the lease provides that the tenant must obtain the landlord’s consent to the assignment of the lease. The landlord’s obligations to act reasonably do not arise until the tenant actually asks the landlord to consent to the assignment and does everything the lease requires the tenant to do as a precondition to assignment.

2.   The procedure must be driven by the tenant.
The tenant must make the request to the landlord for consent to the assignment. The assignee cannot make the request. The tenant must drive the procedure and only involve the assignee as necessary to obtain information about the financial status and business experience of the assignee. This is a common error.

3.   Landlord delays.
A delay by the landlord, including continued requests for information, can be deemed to be a withholding of consent. However, if points 1 and 2 have not been complied with, then the landlord’s obligations have not yet arisen and the landlord cannot then be said to have unreasonably refused consent.

Contact Catherine Hellgath, Swaab Attorneys, if you are:

  • a landlord facing pressure to consent to an assignment and have not been provided with the information you have asked for
  • a tenant facing a landlord who seems to be delaying consent
  • a landlord and you want to refuse consent to an assignment
  • need guidance about the appropriate actions to take in an assignment situation

Please contact

Catherine Hallgath, Partner, Swaab Attorneys on 02 9233 5544 or mailto: clh@swaab.com.au

Comments

Comments are disabled for this post