This article explores the key points which tenants must consider when seeking their landlord’s consent to an assignment of their lease. The topic may conveniently be divided into five sections, as follows:
- has an application for consent was submitted by the tenant?
- what information can the landlord request in respect of the assignee?
- did the landlord withhold its consent to the assignment?
- was it unreasonable for the landlord to withhold its consent, contrary to s133B of the Conveyancing Act 1919 (NSW) (the Act) (which provides that, where a lease requires the landlord’s consent to an assignment of the lease, the landlord’s consent must not be unreasonably withheld)?
- will the tenant be released from all future liability under the lease after the assignment?
Has an application for consent been submitted?
The starting point for a tenant is to submit to the landlord (usually) a written request to assign its leasehold interest in accordance with the terms of the lease (Tenant’s Notice). The landlord’s obligation to consider the tenant’s request for assignment only arises upon receipt of the Tenant’s Notice. In decision of Tamsco Ltd v Franklins Ltd1, the Court emphasised the significance of the tenant actually having to actually request the landlord’s consent.
This is the case even where ‘the assignee is a person to whom there could be no reasonable objection2. Before the tenant provides information relating to, for example, the assignee’s financial capabilities required for obtaining the landlord’s consent, it must properly communicate its request for consent to the landlord (in compliance with not only the assignment provisions, but also the notice provisions under the lease).
What information can the landlord request in respect of the assignee?
The starting point here is to consider the terms of the assignment provision of the lease, which should specify the information the tenant must provide to the landlord in respect of the assignee.
For example, many leases will require the tenant to prove to the landlord that the assignee:
- is a respectable, responsible and solvent person, capable of complying with the terms of the lease; and
- has adequate financial standing not inferior to that of the tenant.
In this respect, it is common for tenants to provide to the landlord copies of the assignee’s tax returns and balance sheets (to evidence the adequate financial standing and solvency) and references from peers to evidence their responsibility and respectability in operating their business within the relevant industry.
It should be noted that a landlord may not ‘oppressively demand extensive particulars or insist upon the equivalent of answers to interrogatories’3. All that is required is fair dealing between the parties to enable the landlord to make a ‘reasonable decision’4. So, it is important that landlords do not request any information inconsistent with what is permitted by the terms of the lease or which is irrelevant for the landlord making an informed decision in relation to whether its consent should be provided.
Did the landlord withhold its consent to the assignment?
The question here is whether after:
- formally requesting the landlord’s consent; and
- submitting to the landlord all information relating to the assignee required by the landlord (as dictated by the assignment provisions in the lease) to assess whether its consent should be provided to the assignment,
the landlord has refused to consent to the proposed assignment.
In practice, where a landlord refuses to consent to an assignment of the lease, it will serve a notice to that effect on the tenant. However, where landlords are silent on whether they have consented to the assignment, their conduct becomes relevant for consideration. Courts have decided that some landlords, by virtue of their conduct alone, have consented to assignments. This occurred in Chamberlain Group Pty Ltd v Kids for Life Academy Pty Ltd5, where the landlord, for example:
- had knowledge that the assignee was already occupying the premises and did not object to such occupation; and
- collected rent from the assignee6.
If the landlord did withhold its consent, was it unreasonable for it to do so?
A landlord will have typically acted unreasonably where it has refused to provide its consent to an assignment for purposes unconnected with the subject matter of the lease7. For instance, it is generally unreasonable for a landlord to refuse to provide its consent to obtain a ‘collateral advantage’ which has no relationship with the terms of the lease.
An example of this may include a landlord making the granting of its consent conditional upon a lump sum cash payment by the tenant to the landlord, an advantage which the landlord would not have otherwise been entitled to under the lease.
Will the tenant be released from all future liability under the lease after the assignment?
For commercial leases, if a lease is silent in relation to whether a tenant is released on assignment, then the tenant will not be released on assignment.
For example, this will mean that where the assignee fails to pay rent under the lease after the assignment occurs, the landlord may still sue the tenant to recover the unpaid rent.
If a tenant wants to be released on assignment, it is important for it to include an express release on assignment in the lease agreement or negotiate an express release within the deed of consent to assignment.
What does this mean for tenants?
Tenants must ensure that they have properly communicated to the landlord their request for the landlord’s consent to an assignment of the lease. It is always prudent to prepare the request in writing and serve it on the landlord in accordance with the notice provisions in the lease.
Where the landlord has considered the request and unreasonably refuses to provide its consent, there are remedies available to tenants. Notably, tenants may seek a declaration by the NSW Supreme Court to the effect that the landlord has unreasonably withheld its consent to the assignment, contrary to section 133B of the Act.
What does this mean for landlords?
When a tenant makes a formal request for consent to an assignment, landlords must ensure they are not taken to have impliedly (by their conduct) consented to the assignment of the lease. Landlords should:
- promptly acknowledge receipt of the tenant’s request for consent to the assignment; and
- request financial (and other) information relating to the proposed assignee in accordance with the terms of the lease (which, practically speaking, should be done at the same time they acknowledge receipt of the tenant’s request).
This will equip landlords with all information they require to make a proper and informed decision as to whether they ought to be consenting to the assignment of the lease. However, landlords should note that they should only request information which would have a direct impact on their willingness to provide or withhold their consent.
Furthermore, landlords must note the importance of ensuring that the tenant is not released on an assignment of the lease. This may also make leased assets more ‘bankable’ and may increase the capital value of landlords’ assets.
Contact us
If you require any assistance relating to retail and commercial leasing transactions, commercial acquisitions and disposals and other real estate transactions, contact Partner John Frangi on 0417 252 203 or by email.
1 [2001] NSWSC 1205.
2 Ibid [37].
3 Daventry Holdings Pty Ltd v Bacalakis Hotels Pty Ltd [1986] 1 Qd R 406, 543.
4 Ibid.
5 [2015] NSWCA 241.
6 Ibid [27]–[28].
7 Ashworth Frazer Ltd v Gloucester City Council [2001] UKHL 59 [3].
