When a lease is entered into, the term of the lease is often a set term for a period of time. Some leases have a term that is around three (3) years, other leases have a term that is more than twenty (20) years.
As time passes, some of those leases are no longer required by their respective Tenants. Or, if a business is sold, the Purchaser of that business will normally take the lease with the business.
How does a transfer of lease work?
Each lease has provisions stating whether the lease is capable of being transferred to a third party. This is called an ‘assignment of lease’.
Most leases require the consent of the Landlord before the lease is transferred. Some leases require the consent not to be unreasonably withheld by the Landlord. Others leave it up to the Landlord at its discretion to decide whether or not to transfer the lease.
Landlords, when considering whether to consent to the transfer of a lease, will consider the financial position of the proposed new Tenant in order to ensure that the new Tenant is capable of meeting the lease’s obligations without difficulties.
When a transfer of lease is prepared, through an agreement called ‘Deed of Consent to Assignment of Lease’, both the current Tenant and incoming Tenant are required to sign, as well as the Landlord.
If either party is an incorporated company, the directors and/or director/secretary must sign in their capacity as a director as well as their capacity as a guarantor.
Complications of a transfer of a lease
When a lease is transferred, the new Tenant inherits the whole of the lease, including any breach by the old Tenant. For instance, if the old Tenant has not been consistent with the payment of rent, or has caused damage to the property, once a lease is transferred to the new Tenant, those obligations become the obligations of the new Tenant.
On that basis, it is better practice to keep the old Tenant as a guarantor of the lease even when the lease is transferred to a third party.
Protection of the new Tenant’s legal interest in the lease
Although documentation of the transfer of the lease is essential, a transfer of a lease must be registered with the New South Wales Land Registry Services Office in order to protect the interest of the new Tenant. Otherwise, the rights of the new Tenant under the lease may remain in jeopardy.
What if the landlord does not consent?
If the Landlord is either required to consent, or must not unreasonably withhold its consent (and does not do so) the Tenant is able to take the Landlord to a tribunal in order to force the Landlord to provide its consent.
- A transfer of lease must contain the consent of the Landlord;
- The transfer must be documented by way of written agreement;
- The transfer must be registered with the New South Wales Land Registry Services Office; and
- The new Tenant must be careful about its obligations under the lease, including any breaches by the old Tenant.