Assigning your lease: A how to guide
If you are considering assigning your lease, it’s generally for one of two reasons:
- you are selling your business, which operates from the premises that you are leasing; or
- you are developing an early exit strategy from your lease and you have found a party who will take on the existing lease.
This article examines the systematic process of an assignment of lease. As well as providing some key items for consideration when requesting Landlord consent or reviewing a deed of covenant on assignment.
Once you have identified that assigning your lease is optimal for your business or property strategy, then you need to carry out the following preliminary steps:
- review the assignment of lease provision in your lease to determine the process surrounding assignments;
- identify the requirements for obtaining the Landlord’s consent;
- collaborate with the proposed new Tenant (or assignee) in respect of their financial and business acumen and assess whether it is consistent with your own; and
- prepare a consent application for the Landlord. This consent application will include the financial and business records of the assignee.
When considering whether it will provide consent, the Landlord is primarily concerned with three major issues:
- whether the proposed assignee will maintain the permitted use under the lease;
- the capacity of the proposed assignee to comply with the terms of the lease for the duration of the term (e.g. financial position and business experience); and
- that the Landlord, or the Landlord’s asset, is in no worse a position.
Whether you engage a consultant for assignment of lease services or you go it alone, ensure the request for consent addresses the Landlord’s key concerns. Occasionally Landlord consent disputes can arise. If you are having difficulties obtaining consent, refer to our article ‘Landlord Consent Disputes: Assignment of Lease‘ for further guidance.
Deed of Covenant on Assignment
Provided that the Landlord agrees to the assignment in principle, the next step will be to enter into a deed of covenant on assignment. This deed, in part, will formalise the Landlord’s conditions of consent. For example, the assignee providing a replacement bank guarantee. In addition, you can usually expect to see the following provisions within a deed of consent on assignment:
- appropriate warranties will be given as to any prior breaches of the lease;
- the assignee will agree to be bound by, and comply with, the lease for the duration of the term;
- pertinent releases will be given to you (as assignor) and the Landlord; and
- payment of the Landlord’s legal costs.
Note that either the assignor or the assignee will be responsible for the Landlord’s legal costs.
Above we referred to release provisions within the deed of covenant on assignment.
As the outgoing Tenant (or assignor) you want to ensure that you are released from your obligations under the lease from the assignment date. If you are a retail tenant, the retail legislation will somewhat govern the release provisions.
If you have engaged a Tenant representative or leasing consultant to carry out assignment of lease services, they will ensure the operation of the release provision is accurate.
Assignment of Registered Leases
If your lease is registered then, in addition to the deed of covenant on assignment, a titles office transfer document will also be required. In Queensland, this is a Form 1 Transfer. In NSW, this is a Form 01TL Transfer of lease, mortgage or charge.
The executed transfer document will be given to the assignee on the assignment date. Once the transfer is lodged, the assignee will receive indefeasible title. Ensuring receipt of indefeasible title is quite critical for any assignee. It protects the rights of the assignee if the Landlord sells the property during the term of the lease.
If you have provided a bank guarantee under the lease, then the assignee will usually be required to provide a replacement bank guarantee. Often the terms of the lease are not specific as to when the Landlord is required to return the bank guarantee. Alternatively, the lease may state that the Landlord is only required to return the bank guarantee within a reasonable period after the end of the lease.
Given the significant cost involved in maintaining a bank guarantee we recommend that you negotiate a specific return time for the bank guarantee. The optimal situation would be to organise an exchange at settlement (in the context of a business sale).
Assigning a Retail Lease
If the lease being assigned is a retail lease, then the assignor and assignee will have additional disclosure obligations.
For the assignor, it is vital that it complies with its disclosure obligations because it will determine whether or not the assignor receives a release of its obligations under the lease upon the assignment date. A failure to comply can result in the assignor continuing to be obligated under the lease until the expiry date.
In Queensland, the assignor disclosure statement provides important lease details, such as:
- the annual rent and any rent concessions;
- rent review dates and structure;
- estimated outgoings;
- any options to renew;
- details of any outstanding notices (either from the Landlord or Government); and
- sales figures (in the context of a business sale).
You can download an Assignor Disclosure Statement here.
The Landlord may also have disclosure obligations; however, this varies across each jurisdiction. For example:
- in New South Wales, the assignor can request the Landlord to provide an updated disclosure statement. It must be provided 14 days from request; and
- in Queensland, the landlord must give the assignee a disclosure statement at least seven days before the assignment date.
Your Tenant representative or leasing consultant will monitor the timing for the disclosure obligations during the course of the matter. If a party fails to comply with these requirements, the party providing your assignment of lease service will be able to advise you further.
If you are assigning your lease in the context of a business sale, then that sale will attract stamp duty. Ensure that you speak to your Tenant representative or property lawyer about these potential implications.
Given the multitude of parties that can be involved in assigning your lease, the process can become overwhelming. Take the time to understand the steps involved in the transaction and ensure that the deed of covenant on assignment addresses critical issues, like the return of your bank guarantee.
If you are a retail tenant, the process can become even more complex with the additional disclosure obligations. In some states, a failure to comply with your disclosure obligations has significant consequences.
If you are considering assigning your lease, Liberty Leasing offer Tenant Representation & Advisory Services. We can provide ad-hoc advice or offer a full transaction management role. Our transaction management service means that we take care of everything – from the request for landlord consent to negotiating the deed of covenant on assignment. You can contact Liberty Leasing on (07) 3359 8273 or book an appointment online here.