When can a retail shop landlord refuse a tenant’s request to assign the lease? Not often
Usually, the terms of a lease will require a tenant to obtain the landlord's consent before the tenant may assign their lease to a proposed new tenant (the New Tenant). As a general condition of all leases in New South Wales, the Conveyancing Act 1919 (NSW) (Conveyancing Act) prohibits a landlord from unreasonably withholding consent to an assignment of a lease. In the case of a retail shop lease, however, whether or not a landlord can withhold consent is more strictly governed by the Retail Leases Act 1994 (NSW) (RL Act).
The lease itself will often state instances in which the landlord can withhold its consent (eg, if the tenant is in breach of the lease) and conditions that the landlord may impose on its consent to an assignment (eg, execution of a deed of consent, payment of the landlord's costs etc).
However, section 39 of the RL Act overrides the terms of a lease and the Conveyancing Act by listing four circumstances in which the landlord is entitled to withhold its consent (with a fifth to be added when the Retail Leases Amendment (Review) Act 2017 (NSW) commences on 1 July 2017) and stating that the landlord "is not entitled to withhold that consent in any other circumstances".
Those circumstances are:
- Change of use – where the New Tenant proposes to change the use of the premises (eg, the lease provides the tenant can use the premises to conduct a hairdressing business, but the New Tenant wants to simply sell hair products);
- Inferior resources or skills – where the New Tenant has financial resources or retailing skills that are inferior to those of the current tenant;
- Failure to comply – where the current tenant has failed to follow the procedure for obtaining consent to the assignment of the lease outlined in the RL Act.; and
- Inferior skills for international airport – where the New Tenant has inferior skills for competing in the international airport retail market.
- (from 1 July 2017) Public tender– where the lease was granted by public tender and the New Tenant does not meet any criteria of the tender.
The restrictive provisions of the RL Act mean that a landlord must be careful about the grounds on which it wishes to rely when refusing consent to an assignment. For example, an assignment of a lease is usually part of a sale of business. It is not uncommon for a tenant who has fallen behind in payment of rent to seek the landlord's consent to assign the lease as part of the sale of that tenant's (struggling) business, nor is it uncommon for a landlord to consent to that assignment on the condition that the tenant pays the outstanding rent from the proceeds of the sale of the business. However, the fact that the tenant is in breach of the lease is not a circumstance in which a landlord can withhold its consent to an assignment under the RL Act. Any landlord withholding consent subject to rectification of that breach risks being found to have contravened the RL Act.
Returning to the Conveyancing Act, the general prohibition against unreasonably withholding consent applies in addition to the five circumstances listed in the RL Act. For example, by refusing consent on the basis that a New Tenant has insufficient experience in operating a business of the precise nature that the tenant currently operates from the premises (and which the New Tenant proposes to operate), a landlord might be found to have acted unreasonably in determining whether or not a New Tenant has financial resources or retailing skills that are inferior to those of the tenant.
Furthermore, the RL Act requires the landlord to advise the tenant in writing whether or not it consents to the assignment of the lease within 28 days of receiving the tenant's request. A landlord who does not respond is deemed to have consented to the assignment.
In short, if a landlord receives a request from a tenant to assign a lease, that landlord should act promptly and seek legal advice before refusing that request.
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