When you sell a business that’s run from leased premises, you need to be aware that your landlord has a say in whether the sale goes through or not.
Once you have a buyer for your business, and you’ve agreed on a price and nutted out the relevant terms, the assignment of your lease to the buyer is almost always a necessary part of the sale.
In most business leases, your landlord must agree to the assignment before it can take effect.
- Overviews the law relating to lease assignments in the ACT; and
- Provides business owners with some tips to consider when selling their business.
A typical business lease
Your typical business lease will almost always contain a clause stating that you must not assign the lease without the consent of the landlord. Your landlord must therefore agree to your sale by approving your buyer – because your buyer will be their new tenant. Your landlord will want to know who is their new tenant, and what is their business experience and financial standing – this is part of the approval process.
Your lease will usually say that the landlord must not unreasonably withhold their consent to an assignment. In practice, it is difficult to measure whether a landlord is being reasonable or not when they do not agree to new tenant. So this gives the landlord a lot of power in the transaction.
Legislation – Retail & Commercial Leases
In the ACT the Leases (Commercial and Retail) Act 2001 (the Act) governs the assignment of retail and commercial leases. All other jurisdictions in Australia have similar legislation. The Act will apply to most commercial and retail leases if there is any inconsistency between your lease and the Act.
The very first step under the Act is to give the prospective buyer a copy of the disclosure statement for the premises – this is a document the landlord would have given you at the start of the lease (section 93). You may then request the landlord to agree to the assignment of your lease to the prospective buyer (section 95).
At this point you should give the landlord information about the prospective buyer, or usually you will direct the prospective buyer to deal direct with the landlord to give them information about themselves. The landlord is empowered to request additional information about the prospective buyer.
Once you have made your request (make sure you do this in writing) and the landlord has received any information requested about the prospective buyer, one of three things can happen:
- The landlord agrees to the assignment
You can sell your business! You, the landlord and the prospective buyer should then sign documents to assign the lease, which include releases between you and the landlord.
- The landlord does not answer the request in time
There are time limits under the Act for the landlord’s response to your request, these are to protect you from delay. If the landlord fails to answer in time, they are automatically deemed to have consented;
- The landlord says no to the assignment
The Act says a landlord can only withhold consent ‘if it is reasonable in all the circumstances to do so’.
When Can Your Landlord Withhold Consent?
There are a range of circumstances in which a landlord can reasonably withhold consent, including:
- The potential buyer is not financially sound.
Their financial position may be considerably worse than yours, or they may be new to business with no financial history or references, and a landlord will not want to take the risk;
- The potential buyer is unwilling to provide personal guarantees (if they are a company) equivalent to those provided by you under the lease.
If your potential buyer is a public company, its directors will typically refuse to provide personal guarantees so you’ll need to negotiate on this;
- The potential buyer does not have the skills to run the business.
Where they are new to business, they won’t have the experience to prove that they can make it work;
- The potential buyer’s use of the premises is not allowed under the lease or is incompatible with other tenants
This is unlikely to be a problem where the potential buyer is purchasing and continuing your business; or
- You have breached the lease and not rectified the breach.
This gives the landlord a right to terminate.
What can you do if consent is withheld?
If your landlord refuses consent on what appears to be reasonable grounds, there is really nothing you can do to force their hand. You could consider looking for alternative premises, however: You probably have time to run in your existing lease that will cost you money; and you will need advice on the GST going concern status of your sale if you change premises.
If you think your landlord is unreasonably withholding consent, your only option is to commence legal proceedings. If the Act applies to your lease, it allows you to apply to the Magistrates Court to have a landlord’s refusal overturned only on the grounds that it is unreasonable.
These court actions are difficult to win as they come down to the reasonableness of the landlord’s actions, which is subjective and hard to gauge. These court actions are also time consuming and expensive, and your potential buyer may move on while you are running the action.
Ramifications of Landlord Withholding Consent
The most serious ramification of your landlord withholding its consent is that the proposed sale of your business will not proceed. In this way your landlord can force you to hold on to a business you no longer want.
Tips for transferring your lease when selling your business
- Notify your landlord as soon as possible once you have decided to sell your business. This will give the landlord reasonable time to consider your request for assignment, and will allow the time limits under the Act to run their course.
- Make sure you follow the procedure set out in your lease and/or any applicable legislation (e.g. writing and notice) for requesting the landlord’s consent to an assignment.
- As soon as possible, give your landlord all relevant information about the buyer to allow them to quickly and accurately assess the suitability of your potential buyer as a tenant.
- Contemplate whether leasing is the right approach for your business, and as an alternative perhaps consider purchasing your own premises – stay tuned for our next article “Buying Business Premises Through Your SMSF”.
For more information or assistance with the sale of your business contact our Property & Commercial Team
Cassandra Emmett – Practice Leader Property & Commercial
Kellie White – Conveyancing Paralegal
P 02 6215 9100