INSIGHTS: Trends in business sales and purchases: assignment of leases

During 2016 Meridian Lawyers acted for many clients in the successful sale or purchase of a wide variety of businesses from child care businesses to dental practices, pharmacies and fitness businesses, to wineries.

Where a business occupies premises under a lease, the lessor may not always be pleased to learn that their tried and trusted tenant wishes to sell the business to a new owner. The lessor may try to oppose the transfer of the lease.

Commercial leases will typically contain provisions that prohibit the tenant from assigning or transferring a lease without the prior written consent of the lessor.

Generally, before a lessor will provide consent to assignment they will require information from the proposed new tenant (the assignee) about  their business experience and financial status, before deciding whether to grant consent.

During 2016 we experienced lessors who opposed the assignment of the lease on the basis that the new tenant was not as experienced or financially sound as the current tenant.

Fortunately, we were able to identify terms of leases or relevant legislation (such as retail leases legislation) which assisted in the assignment of the lease, for example, provisions which require the lessor not to be unreasonable in withholding consent to assignment.

We have also experienced a lessor seeking to impose very high costs on the vendor of the business in respect of their legal costs of dealing with an assignment of a lease, and also seeking to impose extremely onerous increased security deposit requirements on a purchaser.

Tips:

• It is important to ensure that sale of business contracts contain suitable conditions precedent to completion including a requirement for  the lessor to consent to assignment of the lease on terms no less favourable than are contained in the current lease – this can sometimes help to protect a purchaser from a lessor who seeks to impose new, onerous terms on the incoming tenant.
• Be aware that the lease itself or relevant legislation (such as retail lease legislation) may limit the lessor’s power to refuse consent to  assignment.
• Before exchanging contracts for the sale of a business, agree with the vendor who is to pay the lessor’s legal costs of dealing with an assignment.

For more information, please contact Principal Georgina Odell.

Disclaimer: This information is current as of February 2017. This article does not constitute legal advice and does not give rise to any solicitor/client relationship between Meridian Lawyers and the reader. Professional legal advice should be sought before acting or relying upon the content of this article.