Assigning a Retail Lease

201501.14

I was recently involved in a small business transaction where a landlord’s managing agent sought to impose a 4.4% “Transfer fee” on a tenant in connection with the assignment of a retail lease.  The “Transfer fee” was calculated as a percentage of the annual rent inclusive of GST, and amounted to approximately $7,000.

In this particular instance, the landlord’s agent had had no involvement with the sale of the business, nor was he required to negotiate any variations or extensions to the existing lease.  It was, quite simply, a straightforward assignment from an existing tenant to an experienced operator.

It was asserted by the managing agent (rather cheekily, I think) that the “Transfer fee” was reimbursement of the landlord’s cost to his agent for the transaction.  However, the lease made no provision for the payment of such a fee, and no agreement had been reached with the tenant.

This type of transaction raises some important issues in terms of assessing what conditions can be imposed by a landlord (or its agent) in the context of a business sale and the assignment of a retail lease.

The Role of the Retail Leases Act 2003 (Vic)

In the context of a retail lease, the Retail Leases Act 2003 (Vic) (Act) has an important role to play to setting out when a landlord is entitled to withhold consent to an assignment of lease.  Under section 60 of the Act, it is only entitled to do so if one or more of the following applies:

  • the proposed tenant proposes to use the retail premises in a way that is not permitted under the lease
  • the landlord considers that the proposed tenant does not have sufficient financial resources or business experience to meet the obligations under the lease
  • the current tenant has not complied with the reasonable assignment provisions of the lease
  • the current tenant has not provided the proposed tenant with business records for 3 years (or such shorter period as the business has been operating)

The Act goes on to say that a request for the landlord’s consent must be in writing, and the tenant must provide the landlord with such information as the landlord reasonably requires about the financial resources and business experience of the proposed tenant.

Before requesting the landlord’s consent, the tenant must give the proposed tenant a copy of any Disclosure Statement given to the current tenant, and details of any changes of which the tenant is or ought to have been aware.

If the tenant has complied with the above provisions, then a landlord is obliged under the Act to “deal expeditiously with a request for consent” and is “taken to have consented” if it has not given written notice to the tenant consenting or withholding consent within 28 days after the request was made.

It should be appreciated, however, that a non-retail lease is not subject to the Act and therefore any assignment will usually be determined in accordance with the lease terms.  In certain instances, a Landlord can withhold consent “in its absolute discretion”.

Assignment Provisions in the LIV Lease

The Law Institute of Victoria (LIV) Commercial lease (which has been widely adopted by landlords across Victoria) has been drafted having regard to the provisions of the Act.

Under General Condition 4, it provides that a landlord “must not unreasonably withhold consent” to a transfer of the lease if the tenant has:

  • asked the landlord in writing to consent to the proposed transfer or sub-lease
  • given the landlord such information as the landlord reasonably requires about the financial resources and business experience of the proposed tenant
  • provided a copy of the proposed document of transfer or sub-lease to the landlord; and
  • remedied any breach of the lease of which the tenant has been given written notice.

The above provisions are considered “reasonable assignment provisions of the lease” and are therefore consistent with the Act.

A tenant must also pay the landlord’s “reasonable expenses” incurred in connection with an application for consent and the completion of documents, as well as any stamp duty on the documents (if applicable).

The imposition of such expenses is appropriate having regard to the fact that a landlord is usually required, at its own cost, to engage its leasing agent to assess and interview a prospective new tenant, and to arrange for its solicitor to advise on the assignment.  However, the question begs: what are “reasonable expenses”?

“Reasonable Expenses”

Unfortunately, the answer to that question will depend on the particular circumstances of the transaction.  If, for example, an agent and/or solicitor has been involved in extensive negotiations with the current or proposed tenant, or had to assess complex or voluminous reference material, then (reasonably enough) the fee ought to reflect such time, effort and skill.

However, in circumstances where there is a straightforward transfer with a minimal amount of time involved, the costs should be significantly less.  Whilst each transaction will be different, I have been advised by reputable agents that the range for a leasing agent’s costs in a standard transaction might be between $850 – $1,500 plus GST.  A landlord’s solicitor’s costs might range between $850 – $2,000 plus GST.

In summary, in the context of a retail lease, a tenant will usually have a number of contractual and statutory rights it can rely upon to protect itself when it seeks to transfer the lease.  Importantly, too, if there is an inconsistency between the lease and the Act, then the Act will prevail to the extent of any inconsistency.

Additionally, if there is ultimately a dispute in connection with the assignment, the parties are entitled to seek recourse to mediation through the Office of the Small Business Commissioner or, if necessary, through the Victorian Civil and Administrative Tribunal (VCAT).

The purpose of the Act is to promote “certainty and fairness in retail leasing arrangements between landlords and tenants”.  Whilst the Act can never completely guard against unscrupulous behaviour, it does go some way to ensuring that all parties are treated fairly.

Thankfully, in my own client’s case, armed with the information as to his rights under the lease and the Act, he was able to negotiate a more “commercial” solution with the agent.  This allowed the assignment to proceed smoothly, and for the deal to be completed on-time.

Matthew Baker-Johnson, Principal of Avery Commercial Lawyers

Matthew is an experienced commercial and property lawyer who regularly advises clients in relation to sale of business and leasing matters.  He is a member of the Law Institute of Victoria (LIV) and is an associate member of the Australian Institute of Business Brokers (AIBB).

Disclaimer: The information contained in this article is intended to provide general information only and is not legal advice or a substitute for it.  You should always consult your own legal advisors to discuss your particular circumstances.