As a commercial landlord, what say do I have over who my tenant sells their business to?

23 May, 2012 | Wade Hansen

If you are the landlord of a commercial property, and your tenant is selling their business, you may want to know what say you have as to who the new tenant might be.  The transfer to a third party of the tenant’s rights to use the property is known as assignment.

The rights of landlords and tenants mainly depend on two things:

1. the terms of any written lease signed by the parties and;
2. part 4 of the Property Law Act 2007 (“PLA 2007”).

If you do not have a written lease, pursuant to section 210 of the PLA 2007, the tenant has no right to assign.  Further, if you do not have a written lease, either party may terminate the tenancy at will, giving only 20 working days notice. This is why we strongly recommend you have a lawyer draft a written lease to give you security.  A written lease locks the tenant in for an agreed period of time and gives the tenants the security of tenure for the term or period of the lease.

If you have an existing written lease, then a close examination of the wording surrounding any rights to assign the lease should be undertaken.  A lot of leases are based on the standard form Auckland District Law Society (“ADLS”) lease, which includes as a standard term the tenant’s right to assign the lease, subject to obtaining the landlord’s written consent to the assignment. However, the landlord shall give that consent if the following conditions are fulfilled:

a)the tenant proves to the satisfaction of the landlord that the assignee is respectable, responsible and has the financial resources to meet the commitments under the lease;

In order to satisfy this condition, it is reasonably standard practice that the landlord requests the following types of information from the proposed assignee:

• previous business experience relating to the business they will be conducting from the premises;
• details of their previous landlord(s) for the purpose of reference checks;

a list of assets and liabilities of the proposed assignee and/or any proposed guarantor of the assignee (see d) below).

b)all rent and other moneys owing under the lease have been paid and there is not any subsisting breach of any of the tenant’s covenants. An example of a subsisting breach may be if the tenant has made alterations to the premises without obtaining the landlord’s consent.  Then the landlord can require that the tenant reinstate the premises to the original state before the assignment will be consented to.

c)a deed of covenant in customary form is executed and delivered to the landlord;
There is a standard ADLS deed of assignment (deed of assignment and deed of covenant can be used interchangeably) that is often used, which ties the assignee into the terms of the existing lease and more importantly, records that the current tenants is still liable under the deed of lease, should the assignee default.

d)if the assignment is to a company, then a guarantee from the principal shareholders of the company be executed and delivered to the landlord;

A guarantee is necessary if the proposed assignee is a company because if the company goes into receivership or is put into liquidation, then you want to secure another avenue whereby you can recoup any outstanding rental payments. Be mindful to ask for a list of assets of the guarantors in their personal names. If all of the guarantor’s assets are held in a family trust, you would be better to obtain a guarantee from the trust itself. Again, in the standard ADLS deed of assignment, the guarantors are a party to the document and if they sign this, they do not need to sign a separate guarantee document.

e)the tenant pays the landlords reasonable legal costs in respect of the proposed assignee.

The tenant is required to pay the landlord’s reasonable legal costs irrespective of whether or not the assignment proceeds.If your lease follows the standard form ADLS lease, you do have some say as to who takes on the assignment of the lease, but clause 45.1(k) states that you cannot unreasonably withhold your consent. If a reasonable landlord would be satisfied with the information the proposed assignee has provided, then you must grant consent.

How much control you have over who the new tenant is depends on the exact wording of your lease.  In rare cases, your lease may include the right for the tenant to assign the lease to someone else, but might not stipulate what conditions have to be met first.  The wording of leases does vary, and it is important that you understand exactly what rights your particular lease provides to you as the landlord.

Remember, even if as landlord you agree to the assignment of the lease, this does not always mean that the original tenant’s obligations under the lease are immediately terminated. You may still be able to fall back on original tenant and/or the original guarantor if assignee defaults. As always, it is determined by the wording of the lease and any other documents signed at the time of assignment.

If you have are in this situation we recommend that you consult your lawyer to understand exactly what your rights and obligations are under your current lease.  If you do not have a written lease in place with your current tenant, we strongly recommend that you instruct a lawyer to draft a lease recording the current terms of the lease immediately.

For assistance with a tenant assigning their lease or any commercial property matters, contact expert commercial property lawyer Wade Hansen on 09 837 6885 or at wade.hansen@smithpartners.co.nz