Assignments of Lease: Seeking Permission Rather Than Forgiveness

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You may be familiar with the phrase, “It is better to ask forgiveness than permission.” However, before you assign your lease to a third party, you are required to get the landlord’s consent. This is especially if you are a tenant leasing commercial premises.

You will also be required to do the same if you are seeking to sell your business. It would be preferable for the purchaser to continue trade from the existing premises.  This would suit their interest especially if your shop is well known within the community and attracts a local customer base.

Therefore, as the tenant, the sale-of-business contract may be conditional upon you and you must take all necessary steps to arrange for the lease to be assigned to the incoming purchaser.

The landlord’s consent is also a pre-requisite to assignment. You could face obstacles in selling your business if you fail to secure an assignment of lease.  

By the way, the business sale contract should also be conditional for your benefit, not just for the buyer of the business on you obtaining this consent.

If you are leasing a retail shop, an assignment of lease will attract special disclosure requirements (discussed in some detail further down). To help you determine whether you have entered into a retail shop lease, our experienced team of commercial lawyers has produced the article “Retail Shop Leasing in Queensland – a Few Things You Need to Know as a Tenant”. 

What is an assignment of a lease?

An assignment takes place when the tenant (“assignor”) has not completed the term of their lease and wishes to transfer the remainder (“residue”) of the term to a third party (“assignee”).[1] 

When this happens, the assignee effectively “steps into the tenant’s shoes”, and takes over the lease. From that point onwards, the lease is between the original landlord (who remains unchanged) and the assignee (as the new tenant).[2] 

However, it should be noted that some liabilities of the assignor or its guarantors may continue unless things are documented well.

An assignment is distinct from a “sublease”, whereby the existing tenant “carves out” a proportion of their leasehold estate (area or term) and subleases this to a third party (the “subtenant” or “sublessee”).[3] 

In this case, there are effectively two leases in operation: the original lease (or “head lease”) between the landlord and the existing tenant; and the sublease, between the tenant (“sublessor”) and the subtenant. In contrast, an assignment does not create a new lease; the assignee merely takes the tenant’s place under the original lease.[4]

Seeking the landlord’s consent – what you should and shouldn’t do

As noted above, you would need to obtain the landlord’s consent in regards to the assignment of your lease. It may seem easier to “take the line of least resistance” if you have a difficult relationship with your landlord. This is especially true if you want to avoid conversation and choose to proceed with the assignment whether the landlord has consented or not. 

This is not the recommended approach. Ignoring the requirement for landlord consent would constitute a breach of the lease, and may entitle the landlord to forfeit the lease (terminate and re-take possession of the premises).[5] In such circumstances, it is advisable to seek the landlord’s consent in accordance with the relevant terms of the lease.

How to seek the landlord’s consent

You may find the required procedure for seeking the landlord’s consent in the lease agreement. This would include timing requirements and whether consent must be sought in writing.. It is also important to comply with the “notice provision” in commercial leases. This sets out the requirements for giving a valid notice to the landlord under the terms of the lease. 

Who is required to seek the landlord’s consent?

As the tenant / prospective assignor, it is your responsibility to seek the Landlord’s consent to the proposed assignment.

In the case of Tamsco Ltd v Franklins [2001] NSWSC 1205 (“Tamsco v Franklins”), Chief Justice Young stated, at paragraph 37 of the judgment: “It is clear law that where a lease includes a covenant, such as cl 17.1 of the present lease, the lessee must actually seek the consent. Even if the assignee is a person to whom there could be no reasonable objection, the landlord may re-enter for breach if no application for consent is in fact made.[6]

This makes it clear, that the landlord’s consent must be sought, even if is for formality because of the respectable character and impeccable references of the proposed assignee.

His Honour went on to state that, “It must be the tenant who does this, not the assignee, though the tenant may involve the proposed assignee in some of the correspondence and negotiation.”[7] Therefore, the proposed assignee may be included in the negotiation process (which is only logical, as the assignee intends to take over the lease). However, as the tenant, you must take the initiative in approaching the landlord and seeking consent to the assignment.

What is the appropriate procedure for seeking consent?

When seeking the landlord’s consent, you must follow the requirements set out in the lease (including any specified time period or notification requirements). If you fail to do so, your request for consent may be invalid and any  attempt to proceed with the assignment could be regarded as a breach of the lease.

In Tamsco v Franklins, Chief Justice Young commented on the “laid back” manner[8] in which Franklins had sought the landlord’s consent to the proposed assignment of the lease, noting that, “if consent was sought, it was sought in the most desultory [half-hearted] way”.[9]  

While critical of Franklins’ approach, His Honour nevertheless held that it would be sufficient for the “tenant to properly communicate its request for consent” to the landlord.[10]

His Honour’s judgment did not specify what, exactly, “proper communication” might involve. However, it is logical to assume that consent will be communicated “properly” when the request is brought to the landlord’s attention in accordance with the manner prescribed in the lease.[11] In practice, a failure to comply with the requirements in the lease may lead, at the very least, to delays and extra costs in obtaining consent, and in some cases a refusal to grant the consent.

Pre-assignment procedure – retail shop leases:

If you are a tenant under a retail shop lease, there are specific disclosure obligations that you will be required to observe under strict time periods.

Preliminary disclosure obligations – landlord and assignee

As previously noted, an “assignment” occurs when the assignee takes the tenant’s place under the lease. Therefore, there should be some preliminary disclosure between the landlord and the proposed assignee for the information and assurance of both parties.

The landlord is required to give the assignee a disclosure statement (the “Lessor Disclosure Statement”) and a copy of the lease at least 7 days before the assignment of the retail shop lease.. Although the landlord’s disclosure obligations mirrors those of the tenants (as discussed above), the disclosure is now made from the landlord’s perspective.  It will include specific detail about the lease, calculation of rental payments and the retail shop premises.

See the standard Form 7 Lessor Disclosure Statement.

If the landlord misses the 7-day disclosure deadline, the landlord’s disclosure statement may be provided at any time until the assignee enters into the assignment. However, once again, the assignee must provide (a) a waiver notice; and (b) a legal advice report which states that the assignee has been made aware of the effect and implications of the waiver (a legal advice report is not required for an assignee who is a “major lessee” of 5 or more retail shops).

Consequences of a defective disclosure statement:

The exchange of disclosure documents is a pre-requisite to assigning a retail shop lease. However, what happens if a disclosure statement is defective or misleading? Under section 43AA of the Retail Shop Leases Act, the landlord must pay “reasonable compensation” for any detriment suffered by a tenant who is induced to enter into a lease (including a renewal or assignment of the lease) on the basis of the landlord’s “false or misleading” statement.

Additionally, under section 43A, the requirement to pay compensation is extended to a tenant, assignor or assignee who presents a false or misleading disclosure statement in connection with an assignment of a retail shop lease. These “compensation provisions” are implied into most retail shop leases, with the exception of some periodic tenancies and tenancies at will.

For more information about compensation rights and the compensation payable in these circumstances, please read our article : “False and Misleading False and misleading statements or representation in retail shop leases.

What if the landlord says “no” to the assignment?

So far, we have looked at how a tenant/assignor can  seek the landlord’s consent to an assignment of lease (and the additional requirements under the Retail Shop Leases legislation).  You may have jumped through all of the requisite hoops – approaching the landlord to submit your request in accordance with the terms of the lease, engaging in necessary negotiations with the landlord and/or the proposed assignee, and (if you are seeking to assign a retail shop lease) providing the necessary disclosure documentation and a copy of the lease for the assignee’s consideration. What happens, then, if the landlord still says “no”?

In Tamsco v Franklins, Chief Justice Young observed that “the general attitude [of Franklins] was that they had done a commercial deal and the landlord really was not in a position to do anything else but consent.”[16] However, this may have been a premature assumption on Franklins’ part. While there may be a “commercial deal” on the table, this does not necessarily oblige the landlord to consent to the proposed assignment. Whether the landlord has the ability to consent or decline will depend upon the relevant terms and conditions of the lease, including any terms implied by legislation.

At this point, section 121 of the Property Law Act 1974 (Qld) may offer some assistance. This section operates in circumstances where the lease expressly forbids the tenant from “assigning, underletting, charging or parting with possession of premises”, without first obtaining the landlord’s consent. In such circumstances, section 121 provides that the landlord’s consent must not be “unreasonably withheld”, notwithstanding any contrary provision in the lease.[17]

When will section 121 apply?

Section 121 applies to “all leases, whether made before or after the commencement” of the Property Law Act (which commenced in Queensland, in 1974). Therefore, the section will apply to leases generally, regardless of whether the leased premises falls within the category of a “retail shop”.

However, to attract the operation of the section, the lease must contain “a covenant, condition or agreement against assigning, underletting, charging or parting with possession of the premises…without licence or consent.”

Therefore, section 121 will be inapplicable to:

  1. leases which do not prohibit or deal with the issue of assignment or subletting. In this case, the tenant will be permitted to assign or sublet the lease without seeking the landlord’s consent (making the question of unreasonable refusal to consent irrelevant). This is rare and creates its own problems, as only the leasehold estate can be transferred without consent, and not necessarily the other covenants in the lease;
  2. leases containing an express prohibition against assignment.[18] The tenant is thereby forbidden from entering into an assignment of the lease under any circumstances, regardless of whether the landlord’s consent is obtained. (In practice, however, if the landlord consents to the proposed assignment, such consent may be taken as a waiver or variation of the terms of the lease, so that an assignment would become allowable.) An “absolute prohibition” on assignment of a lease is relatively uncommon,[19] as this would make the lease commercially undesirable to any prospective tenant who may later wish to sell their business (and assign the lease) to a third party purchaser;[20] and
  3. leases which contain a series of conditions to the granting of the landlord’s consent. Here, section 121 will not apply, because the lease contains its own set of conditions / requirements (which, the case law suggests, need not be reasonable). However, some leases may provide that, if these conditions are satisfied, “the landlord’s consent must not be unreasonably refused“.[21] In such cases, section 121 will be applicable (despite the list of conditions), because the lease has reintroduced the concept of “reasonable consent“.[22]

Otherwise, if your lease provides that the landlord must consent to the proposed assignment, section 121 of the PLA will, in our view, imply a term “to the effect” that the landlord’s consent cannot be refused / withheld “unreasonably”.

Has Consent been “Unreasonably” Withheld?

The question, then, is whether the landlord’s consent has been “unreasonably” refused. An objective test applies as to whether a “reasonable” landlord would have granted (or conversely, withheld) consent to the proposed assignment of the lease. There is no definitive “rule” as to when the refusal of the landlord’s consent will be unreasonable; this will depend on the individual circumstances of the case.[23]

Historically, the courts have regarded the following as reasonable grounds for refusal:

  1. Character and references of the proposed assignee, including whether they are a “respectable and responsible” person who is likely to be able to fulfil the tenant’s obligations under the terms of the lease;[24]
  2. Property interests of the landlord, including whether the prospective assignment or sublease is likely to affect the landlord’s legitimate redevelopment interests in the property or capacity to lease other parts of that property;[25]
  3. Possible reduction or depreciation in the value of the land if the assignment was allowed to proceed;[26]
  4. Potential loss of commercial reputation among future lessees (relating to the landlord’s general proprietary interests as well as the depreciation in the value of the freehold).[27]

By contrast, the refusal of consent to the proposed assignment may be unreasonable where:

  1. the landlord seeks to impose terms on the proposed assignee which are comparatively more burdensome than those contained in the current lease;[28]
  2. prior to granting or refusing consent to the proposed assignment of the lease, the landlord requires the assignor/tenant to provide a large volume of irrelevant information about the proposed assignee; [29]
  3. the landlord is not acting in good faith or is pursuing an “ulterior motive“, for example, to induce the proposed assignee or sublessee to tenant one of the landlord’s other premises, thereby securing the landlord a collateral economic advantage.[30]

Rather than seeking some personal advantage, the landlord may have the ulterior purpose of depriving another party of a benefit which might be available if consent was given to the proposed assignment of the lease.

In the case of Secured Income Real Estate (Australia) Ltd v St Martin’s Investments Pty Ltd (1979) 144 CLR 596, Justice Mason conducted a review of relevant case authorities, from which His Honour concluded that “the respondent was not entitled to refuse to grant a lease to the appellant so as to deprive the appellant of a benefit which would otherwise accrue to it under the contract.”

 His Honour noted that a “refusal on that ground would be capricious and arbitrary” (which the case law generally equates with “unreasonable”).[31] Nevertheless, the High Court ultimately found that the refusal of consent was not unreasonable if it was based on a “justifiable apprehension[32] as to the ability of an incoming tenant (or proposed assignee) to pay rent “promptly” under the terms of the lease.[33]

Once again, there is no “hard and fast” rule as to when the landlord’s consent may be unreasonably withheld. However, it seems the landlord must have a legitimate commercial reason for refusing consent to the proposed assignment of the lease, and must not be motivated by some undisclosed ulterior purpose.

[1] For a general overview, see MacDonald, McCrimmon, Wallace and Weir, Real Property Law in Queensland (Lawbook Co, Sydney: 3rd ed, 2010).

[2] Ibid.

[3] For an explanative discussion of  the law relating to subleases, see MacDonald, McCrimmon, Wallace and Weir, Real Property Law in Queensland (Lawbook Co, Sydney, 3rd ed, 2010).

[4] Ibid.

[5] Barrow v Isaacs and Son (1891) 1 QB 417, cited in Tamsco v Franklins [2001] NSWSC 1205 at [37] per Young CJ In Eq.

[6] Tamsco v Franklins [2001] NSWSC  1205 at [37] per Young CJ in Eq.

[7] Ibid.

[8] Tamsco v Franklins [2001] NSWSC 1205 at [40] per Young CJ in Eq.

[9] Ibid.

[10] Tamsco v Franklins [2001] NSWSC 1205 at [39] per Young CJ in Eq.

[11] Ibid.

[12] Retail Shop Leases Act 1994 (Qld) s 22B.

[13] Ibid.

[14] Retail Shop Leases Act 1994 (Qld) s22B.

[15] Ibid.

[16] Tamsco v Franklins [2001] NSWSC 1205 at paragraph [38] per Young CJ in Eq.

[17] Property Law Act 1974 (Qld) s121.

[18] See further William Duncan and Sharon Christensen, ‘Assignments of non-retail commercial leases: Some contentious issues’, 24(3) Australian Property Law Journal, 357-370.

[19] Ibid.

[20]  William Duncan and Sharon Christensen, ‘Assignments of non-retail commercial leases: Some contentious issues’, 24(3) Australian Property Law Journal, 357-370.

[21] See, for example, JB (Northbridge) Pty Ltd v Winners Circle Group Pty Ltd [2014] NSWSC 950.

[22] Ibid and see also summary in William Duncan and Sharon Christensen, ‘Assignments of non-retail commercial leases: Some contentious issues’, 24(3) Australian Property Law Journal, 357-370.

[23] For instance, in Bickel v Duke of Westminster [1977] QB 517 (CA), Lord Denning MR commented that, “Seeing how the circumstances are infinitely various, it is impossible to formulate strict rules as to how a landlord should exercise his power of refusal. The utmost the courts can do is give guidance….” (at 524).

[24] Houlder v Gibbs [1925] Ch 575.

[25] Pimms Ltd v Tallow Chandlers Co [1964] 2 QB 547.

[26] Bickel v Duke of Westminster [1977] QB 517 at 524 per Denning MR.

[27] Re Town Investments Ltd Underlease [1954] Ch 301at 304‐305 per Danckwerts J.

[28] Boss v Hamilton Island Enterprises Ltd [2010] 2 Qd R 115, per Fraser JA.

[29] Sticky Fingers (QLD) Pty Ltd v Klooster [2010] QCAT 611.

[30] See Eddadock Pty Ltd v Denning Properties Pty Ltd [2002] NSWC 208.

[31] Secured Income Real Estate (Australia) Ltd v St Martin’s Investments Pty Ltd (1979) 144 CLR 596 at [35] per Mason J.

[32] Ibid at [2] per Barwick CJ.

[33] Secured Income Real Estate (Australia) Ltd v St Martin’s Investments Pty Ltd (1979) 144 CLR 596 at [35] per Mason J.