Business & commercial
Assigning a Commercial Lease When Selling a Business
Direct answer: In most business sales the lease is the transaction. If the landlord does not consent to the assignment, the buyer does not get the premises and the sale generally does not complete. Consent takes time, the landlord will impose conditions, and the outgoing tenant is usually not released from past obligations unless that is expressly negotiated.
Why the lease is a material condition
For most small businesses - a cafe, a salon, a workshop, a clinic - the location, the fit-out and the goodwill are inseparable. A buyer paying for goodwill is paying for a business that operates from those premises. That makes the assignment of the lease a condition the contract has to be built around, not an administrative step to be attended to after signing.
Two consequences follow. The contract should be conditional on the landlord consenting to the assignment by a specified date, and the parties should start the consent process immediately rather than waiting until finance and due diligence are settled.
What the landlord will usually require
A lease will typically permit assignment with the landlord's consent, often expressed as consent that is not to be unreasonably withheld. In practice the landlord will want:
- information about the buyer's financial position and business experience;
- references, and often a business plan for the premises;
- personal guarantees from the buyer's directors;
- a replacement bank guarantee or security deposit;
- a formal deed of assignment or deed of consent;
- payment of the landlord's reasonable legal costs;
- rectification of any outstanding breach by the current tenant.
For a retail shop lease in Western Australia, the disclosure obligations under the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) also come into play, and the assignor generally has obligations to give the assignee information about the lease. Getting that sequence right matters, because disclosure given late does not always fix the problem.
Is the seller released from past obligations?
Usually not automatically. Unless the deed expressly releases the outgoing tenant, the seller can remain liable to the landlord for obligations under the lease, and any personal guarantee given by the seller's directors commonly continues as well. A seller who assumes that handing over the keys ends the exposure can find themselves pursued years later for a default by a buyer they have no control over.
Release is a negotiation, and the moment of maximum leverage is before consent is granted, while the landlord still wants the transaction to proceed. Statutory release provisions exist in some circumstances for retail shop leases and should be checked against the particular lease rather than assumed.
What the buyer should review
- The lease and every variation, in full - not a summary.
- How long the term has left, and whether any option remains.
- How rent is reviewed and what the next increase will be.
- Outgoings: what is recoverable, and what the current figures are.
- Permitted use, and whether it covers what the buyer intends to do.
- Make-good and reinstatement obligations at the end of the term.
- The condition of the fit-out, and who owns it.
- Any existing breach or dispute with the landlord.
- Whether council approvals and licences transfer or must be reapplied for.
A short remaining term with no option is a serious issue for a buyer paying for goodwill, and it is one of the most common problems we see raised too late to renegotiate the price.
Synchronising settlement
The business sale and the lease assignment have to complete together. In practice this means the deed of assignment is executed and dated at settlement, the replacement bank guarantee is provided and the outgoing one returned, keys and codes change hands, and outgoings, rent and any statutory charges are apportioned to the settlement date.
Stock, plant, employees and any transfer of employee entitlements sit alongside this and have their own timing. A settlement where the lease is assigned but the bank guarantee has not been replaced, or where employees have not been dealt with, is a settlement that is going to generate correspondence.
How Legal Care Australia can help
We review the lease before the contract is signed, draft or negotiate the assignment conditions, manage the landlord consent process, negotiate release of the outgoing tenant and its guarantors where possible, and coordinate the lease assignment with settlement of the business sale.
Next step: send us the lease, the draft business sale contract and the details of the parties.
Frequently asked questions
How long does landlord consent take? It varies with the landlord and the completeness of the application. A well-prepared application submitted early is the main thing within your control.
Can a landlord refuse consent? Where the lease says consent is not to be unreasonably withheld, refusal has to be reasonable, and a landlord's concerns usually relate to the incoming tenant's financial capacity and experience. A landlord can generally impose reasonable conditions.
Do I need a new lease instead of an assignment? Sometimes a surrender and a new lease suits both sides better, particularly where the remaining term is short. It is a different transaction with different consequences and should be a deliberate choice.
Official sources
General information only, not legal advice. The lease and the sale contract govern the position in each case.