07 Nov Transferring a lease when selling a business

If you are selling a business which is operating from leased premises, the purchaser will want to be able to take over the occupied premises after the sale. This is usually handled in one of two ways:

1. The vendor can assign the lease to the purchaser (the more common way)
2. The vendor can surrender their lease, essentially terminating it, and the purchaser can enter into a new negotiated lease agreement with the landlord.

The factors to consider when choosing to either assign or surrender the lease include:

• Whether the landlord is willing to surrender the existing lease and enter into a new lease, or if the landlord would prefer to assign the current lease.
• Whether the purchaser is satisfied with the terms of the lease. For example, how much time is left on the lease term.
• Whether the lease will be assigned or surrendered is a matter of negotiation between the prospective purchaser and the vendor (ultimately with the consent of the landlord).

Here are the key considerations when deciding to either assign or surrender the lease.

Assigning the Lease to the Purchaser

Lease assignments involve the vendor transferring their rights and obligations under the lease agreement to the purchaser. This is done through a document called a deed of assignment of lease, also known as a transfer of lease. The deed of assignment essentially places the new tenant (the purchaser) in the position of the previous tenant (the vendor). This means that the new tenant is subject to all the rights and must fulfil all the obligations under the lease agreement.

Consent of the Lessor (Landlord)
A vendor will need to obtain the landlord’s consent for assignment. The landlord must act reasonably in providing its consent but will generally require the new tenant (purchaser) to provide proof of financial capacity the following documents (amongst others) may be requested:

• A statement of assets
• Credit references
• Business experience references

The Assignment Process
Lease assignments involve the vendor, purchaser, landlord and their respective legal representatives. The vendor, purchaser and landlord will all need to sign a deed of assignment lease and typically, each party signs three copies, so that each party has a copy for their own personal records. After this document has been successfully executed, the purchaser acquires all the responsibilities that the vendor previously had under the lease.

Assignment of Retail Leases
In Victoria it is a requirement of the Retail Leases Act 2003 that the vendor (assignor) provide the purchaser (assignee) with a disclosure statement if they are seeking to assign a retail lease. The information in the disclosure statement that must be given to the proposed assignee includes:

• A copy of the disclosure statement that was given to the vendor when they entered into the lease.
• Details of any changes to the lease agreement since they entered into it.
• Business sales records for the last three years.

For the purposes of fulfilling these obligations, the vendor can request the landlord to provide them with a copy of the current disclosure statement. The landlord must provide this within 14 days, or they may be liable to pay a fine.

Surrendering the Lease

Where it has been agreed that the purchaser will enter into a new lease, the current lease is surrendered. Generally, this has the effect that all their obligations under the lease come to an end. The landlord will then enter into a new lease agreement with the purchaser. In most cases, the date of surrender of the existing lease, the date of commencement of the new lease and the settlement of the sale of the business all occur on the same day. A surrender of lease is more common where some of the terms of the lease are renegotiated. Common examples are the length of the lease is extended or additional options are agreed to.

Conclusion

• Depending on the commercial circumstances and negotiations with the landlord on the sale of a business, the lease associated with business premises is either assigned or surrendered.
• Assigning a lease will retain the original obligations and transfer these to the new tenant.
• Surrendering a lease will terminate the prior obligations and allow for the purchaser to negotiate new terms with the landlord.