THINGS YOU NEED TO KNOW IF SELLING/BUYING A BUSINESS WHICH OPERATES UNDER A RETAIL SHOP LEASE
Tue, 10 Sep 2019
When you are considering buying or selling a business which is currently operating under a retail shop lease, it makes sense that the transaction would necessarily include the assignment or transfer of the retail shop lease from the existing business owner to the incoming purchaser.
Our lawyers have previously written an article on the difference between retail shop leases and commercial leases (which you can read here), however this article is specifically written to provide information on the process to have a retail shop lease transferred to an incoming purchaser, and the steps that need to be taken under the relevant legislation.
The Retail Shop Leases Act 1994 (Qld) (RSLA) sets out the process of assigning a retail shop lease, including the pre-assignment procedures, disclosure requirements, legal/financial advice requirements and other miscellaneous general provisions which are applicable to retail shop leases.
Generally speaking, the assignment of a lease is required when the existing tenant is unable to complete the term of their lease, and seeks to transfer the time that is left on the lease to another party, for example the incoming purchaser. Essentially, the assignment results in the purchaser stepping into the original tenants shoes for the remainder of the lease rather than the creation of a new lease by way of a sub-lease.
Further, most Retail Shop Leases require the prospective purchaser to obtain a Legal Advice Report and a Financial Advice Report prior to signing the lease (if you have less than 5 retail leases under your belt). Our Gold Coast team have a multitude of experience in this area, and are able to provide you with this Legal Advice Report if needed.
It is often a pre-requisite to the assignment of a retail shop lease that the landlord provides their consent to the assignment, and the lease will generally set out the way that this must occur, i.e. the notice period, whether the request must be in writing etc and a failure to do so may invalidate the request and could also be regarded as a breach of the lease.
The legislation also outlines specific disclosure obligations which must be conducted in accordance with strict timeframes before an assignment of the lease can be entered into.
These disclosure obligations include the current tenant providing a disclosure statement and copy of the current lease to the proposed assignee, at least 7 days before the proposed assignee signs a business sale contract or the day on which the current tenants asks the landlord to consent to the proposed assignment of the lease, whichever occurs earlier.
In addition, the landlord must also provide a Lessor Disclosure Statement to the proposed assignment which mirrors the disclosure statement given by the current tenant, however it is provided from the point of view of the landlord and includes further information about the lease, the retail shop premises and the calculation of the rental payments.
If the tenants or the landlord’s disclosure statements are provided out of time, then there are ways to rectify the issue, however it is best practice to abide by the timeframes as stipulated, if possible, to avoid possible complications and/or increased costs.
As part of the disclosure requirements, the proposed assignee must also provide a disclosure statement to the current tenant, which should be provided before the current tenant seeks the consent of the landlord to the assignment.
Upon the current tenant seeking the landlord’s consent to the assignment, a copy of the disclosure statement which was provided to the proposed assignee will also be provided to the landlord.
In this way, the preliminary disclosure between all parties (landlord, current tenant and proposed tenant) should provide sufficient information and assurance to the parties in order to proceed with the assignment of the lease.
There are various compensation provisions detailed under the RSLA which may apply to circumstances where disclosure statements have been defective/false/misleading, and have resulted in the entry into, or the assignment of a lease. Requirements to pay compensation in those circumstances include the landlord and can extend to existing tenants as well as the incoming/prospective tenant.
Does the landlord have to provide consent?
The terms and conditions contained in the lease, and implied terms under the relevant legislation, will determine whether the landlord has the ability to decline to consent to the proposed assignment.
Generally speaking, the landlord must not ‘unreasonably withhold’ consent to a proposed assignment, however the test to determine what is ‘reasonable’ is objective, and there is no definitive rule which will apply. Essentially, it will come down to the individual circumstances of the case.
We can however look at some of the Court’s historical decisions to see what has previously been considered as reasonable grounds for the refusal of consent, and use these as a guideline when contemplating an assignment of a lease.
Such grounds have included:
- the ability for the proposed tenant to be able to fulfil the tenants obligations under the terms of the lease (i.e. are they a ‘respectable and responsible’ person);
- whether a proposed assignment is likely to affect the redevelopment interests in the property that the landlord has, or their capacity to lease out other parts of the property;
- a possible depreciation or reduction in the value of the land;
- where there is a potential negative impact on the commercial reputation of the landlord amongst future lessees.
In any event, if you are contemplating entering into a Retail Shop Lease, or you are looking at buying or selling a business to which the RSLA applies, we strongly recommend that you contact one of the experienced property lawyers at Affinity Lawyers today to obtain independent legal advice as to your rights and obligations. Please contact us today on 07 5563 8970.
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