Building up a business is hard work. Developing relationships with customers and suppliers. Employing and managing staff. Red tape and paperwork. Putting out spot fires daily. And then, one day, maybe bringing in partners, changing the ownership structure or selling altogether.
The lease is one of the most important features of a business. Important factors include location, foot traffic, goodwill, convenience to transport and customers, and ability to borrow based on security of tenure. However, the lease of business premises is often a “set and forget” part of the business.
Tenants need to keep the lease in mind whenever a business’s structure or ownership changes.
Recently I have seen several situations where a business has been sold or new partners have bought in, and settlement has taken place without the landlord being notified or asked for consent. It is often where the business is small, owners are relaxed, or the buyer is an employee, friend or family member.
The fine print of all leases contains the requirement to seek the landlord’s consent to any proposed “assignment” of the lease. An “assignment” obviously covers a transfer of lease where a completely new tenant is coming in, but it also includes:
- Adding new parties as a co-tenant; and
- A change of control where the tenant is a company, and 50% or more of the company shares are changing hands.
A landlord cannot unreasonably refuse consent, but they want the opportunity to assess and usually meet with the potential new tenant. Usually, a Deed of Consent will be signed by all parties. The landlord’s reasonable legal costs are payable by the outgoing tenant.
A failure to obtain landlord’s consent is a breach of the lease. The new occupant is an unauthorised occupant of the premises. A landlord may therefore issue a breach notice to the tenant who has moved out, requiring the breach to be remedied. Technically, this means replacing the new occupant with the previous tenant! After all, the landlord did not ask for a new tenant, and was not asked if it was OK for someone else to move in. Obviously, a buyer of a business may not be happy having to move out, having spent a lot of money buying the business!
In practice, what usually happens is a messy, embarrassing, and expensive retrospective application to the landlord for consent to the assignment of the lease.
It is much easier to be on top of the situation and ask for the landlord’s consent well before settlement. Also, make sure that Landlord’s consent is a condition of any business sale contract. The standard REIQ business sale contract covers this. It is important to get legal advice on any proposed sale of change of structure or ownership of a business. The Business and Corporate team at FC Lawyers have deep experience in all kinds of business and corporate transfers, and leasing matters.
Contact our team today to discuss your business legal needs.
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