Assigning a commercial lease when you buy or sell a business

When a business trades from leased premises, the lease can be a large part of what the buyer is paying for. If little time is left on it, or the landlord will not agree to a transfer, the price can suffer and the sale can fall over. This guide explains how a lease passes from seller to buyer, going deeper than our overview of the legal and tax steps in a business sale. It is general information only, and the rules differ between states and territories.

Assignment or a new lease

• Assignment. The seller (the assignor) transfers its existing lease to the buyer (the assignee), who takes it over for the rest of the term on the terms already in it. The transfer is often recorded in a three-way deed of assignment between seller, buyer and landlord.
• A new lease. The buyer negotiates a fresh lease with the landlord and the seller's lease is ended by agreement. This can suit a buyer when little time is left, but the landlord can set new terms, including the rent.

Ask the landlord early which route it expects.

Why the landlord's consent matters

Leases commonly stop the tenant assigning without the landlord's consent. The landlord will want to know the buyer can pay the rent and run the business. Requests vary, but commonly include:

• financial information, such as accounts or a statement of assets and liabilities
• business experience, especially in the same kind of business
• references
• guarantees from the directors when the buyer is a company
• security, such as a bank guarantee or bond.

For retail leases in NSW and Victoria, the request must be in writing and include information about the buyer's finances and business experience. The NSW Small Business Commissioner notes that the landlord does not have to accept a tenant who is less reliable than the current one.

Retail leases law differs by state

There is no national retail leases law. Each state and territory has its own retail leasing legislation or regulations, which can set rules on assignment requests, disclosure statements and whether the seller stays liable. For example:

• New South Wales. Under the Retail Leases Act 1994, the seller gives the buyer an updated lessor's disclosure statement, gives an assignor's disclosure statement to the buyer and the landlord, and writes to the landlord asking for consent.
• Victoria. Under the Retail Leases Act 2003, the seller must give the buyer the disclosure statement it received from the landlord and disclose any changes it knows of. Failing to do so is an offence. On a business sale, the seller must also give the buyer the last three years of business records.
• Queensland. Under the Retail Shop Leases Act 1994, when the assignment is part of a business sale, the seller must give the buyer an assignor disclosure statement at least seven days before the buyer enters into the sale contract. The buyer generally must also give the landlord a financial advice report from a qualified accountant and a legal advice report from a lawyer.

If you are unsure which rules apply, contact your state's small business commissioner or equivalent body.

Does the seller stay liable?

Sellers are not always free of the lease once it is assigned. It depends on the lease, the deed of assignment and the state's law.

• 'No release' clauses. A deed can say the seller remains responsible after the assignment. If the buyer defaults, the seller and their guarantors can be held responsible for unpaid rent, outgoings and breaches.
• NSW. Under section 41A of the Retail Leases Act 1994, a 'no release' clause becomes invalid, and the seller and guarantors are released from future liabilities, if the landlord consents and a completed assignor's disclosure statement is given to the landlord and the buyer at least seven clear days before the assignment. Without a valid statement, the clause may remain enforceable.
• Victoria. Where the assignment continues an existing business, the seller and any guarantors are released if the seller gave the landlord and the buyer a new disclosure statement containing nothing false, misleading or materially incomplete.

What buyers should check in the lease

With an assignment you take on the lease as it stands. Ask your solicitor to check:

• Term and options. How long is left, and what you must do to exercise any option.
• Rent reviews and outgoings. When and how the rent is next reviewed, and which costs you pay on top. Retail leases law can limit outgoings: in Victoria, a retail tenant cannot be required to pay land tax.
• Permitted use. Whether it allows the business as you plan to run it.
• Make-good and fit-out. What must be restored at the end, including fit-out installed by the seller or earlier tenants, and any obligation to refit or refurbish during the term.
• Relocation and demolition. Whether the landlord can move you or end the lease early to redevelop.
• Arrears and breaches. Whether rent is up to date and whether any breach notices are outstanding.

BizExchange listings show lease details and rent, as our guide to reading a business for sale listing explains, but the lease itself is what binds you.

Timing and the contract of sale

Contracts of sale are commonly made conditional on the landlord's consent. Ask your solicitor about a deadline for consent, what happens if it is not given, and whether the buyer must accept consent that comes with extra conditions, such as a larger bank guarantee.

Sellers can start before a buyer is found by reading the assignment clause and asking the landlord what it will want. In Victoria, a landlord asked for a new disclosure statement for the buyer must provide it within 14 days. Keep a record of when each document was sent and received.

If the landlord refuses or delays

• Deemed consent. For retail leases in NSW and Victoria, a landlord who does not respond within 28 days may be treated as having consented, but only if the tenant has followed the required steps and, in NSW, other conditions are met.
• Grounds for refusal. The Victorian Small Business Commission lists grounds on which a landlord can withhold consent, including a use the lease does not permit and a buyer without sufficient financial resources or business experience.
• Negotiation. The NSW Small Business Commissioner notes a seller can make agreement easier by leaving a security deposit, bank guarantee or personal guarantees in place, though these can leave the seller exposed after settlement.
• Disputes. The small business commissioners in NSW, Victoria and Queensland offer dispute resolution services for retail leases. If consent is still not given, the contract decides what happens next.

Costs

Costs can include the landlord's legal costs, each side's solicitor and any new bank guarantee. In NSW, for a retail lease, the landlord can charge a reasonable amount for the legal and other expenses of agreeing to the request, but not a fee simply for consenting, and the tenant can ask for evidence of the expenses. Elsewhere, check the lease and the state rules, and agree in the contract who pays what.

Offices, warehouses and other non-retail leases

Offices, industrial premises and other non-retail premises may fall outside retail leases law. The NSW Small Business Commissioner says the lease is the first place to look when transferring a commercial lease. Statutory disclosure, deemed consent and release rules may not apply, so the assignment clause and the deed matter more. But in Victoria, the Victorian Small Business Commission notes that the Act can apply to premises used to sell goods or services to other businesses.

Before you sign

• You have read the whole lease, not just the summary.
• You know whether retail leases law applies, and which state's rules.
• Any disclosure statements your state requires have been given on time.
• The contract is conditional on consent, with a deadline and a clear outcome if it is refused.
• Your solicitor has reviewed the deed of assignment, including any 'no release' clause and guarantees.
• You have agreed who pays the landlord's costs and any new security.

For the rest of your checks, use our due diligence checklist.