Selling your business or moving premises? Assigning a commercial lease

12 September, 2014 | Wade Hansen

What are your liabilities when you assign a commercial lease?

If you are part way through a commercial lease and want to arrange for someone else to take over the lease, you will need to “assign” the lease. An assignment of lease is when you assign your obligations to the landlord under the lease, to a new tenant.  This new tenant will become responsible for paying the rent, outgoings, renewing the lease, etc.

You might consider this option if you are thinking about selling your business, or moving your business to a new premises.  Unfortunately commercial leases do not allow tenants to just cancel the lease part way through a tenancy term unless the landlord agrees (this is unlikely unless you have been a bad tenant), so this is why an assignment is necessary.  But, what happens if you have provided a guarantee under your original lease?

What is a guarantor?

A guarantor is the person or persons recorded in the Deed of Lease as guarantor, and who agree to fulfil the obligations of the tenant if they fail to do so.  Most of the time, these obligations relate to paying outstanding rent and outgoings due under the lease.

Are you still liable as guarantor when you assign a lease?

The short answer is yes, you are still liable as guarantor of a lease if you assign it.  The standard terms of lease state that if the new tenant and their guarantor (if any) aren’t able to pay the rent and outgoings under the lease, the landlord can come back and call on you as guarantor, even though you have assigned the lease, to pay the overdue rents and fix and breaches under the lease.

How long will you be liable for and for how much?

You will be liable for all amounts owing under the lease up until the end of the lease term (including any renewed terms).

How can you limit your liability and avoid this?

Your liability as guarantor can be limited at two stages – although both require consent of the landlord.

Firstly, on entering into the lease you can limit your guarantee to either a certain amount, a certain time frame, or provide a bank bond of a certain amount.

Or, when you assign the lease, you could ask for your existing guarantee to be valid only up until the end of the current term, and not to include any renewed terms granted under the lease.

So if you assigned your lease after the first year of a three year term, and there are two rights of renewal of three years each, you would only be liable for the remaining two years of the existing term, not for the additional 3-6 years if the assignee chose to renew the lease.

As an alternative to assigning your lease, you could suggest to the landlord that they enter into a new lease with the new tenant.  Of course the terms of this new lease would have to be favourable to the landlord for them to agree.

Choosing which option is best for you really depends on your circumstances and the terms of your lease at the time you wish to get out.

A skilled commercial property lawyer can review the liabilities you have under your current lease and help negotiate with your current landlord and the new tenant/assignee to reduce your ongoing liability.

If you would like assistance with assigning your commercial lease, contact commercial property lawyer, Wade Hansen on 09 837 6885 or at wade.hansen@smithpartners.co.nz