Lessors and lessees need to have a clear understanding of their rights and obligations under the lease when it comes to a proposed assignment by a lessee of its interest in the lease. If the lease is subject to the provisions of the Retail Leases Act 1994 (NSW) (“Act”), the rights and obligations stated in the lease are subject to the provisions of the Act.
The Supreme Court of NSW recently considered whether a transfer of lease between joint tenant lessees required the consent of the landlord.
The same case also considered whether the consent to transfer was reasonably withheld. The relevant lease was a retail lease which was caught by the Act.
Was consent required?
In this matter there were two individuals as lessees and they held the lease as joint tenants. The purported transfer of the lease was by one joint tenant lessee to the other.
Clause 3.8 of the lease mirrored the provisions of Sections 39 & 41 of the Act and in particular noted that the lessee was not to assign or transfer the lease without the written consent of the lessor.
It was argued that consent to the transfer was not required as the transferor and the transferee were joint tenants and accordingly, the transfer was not in truth a transfer or assignment but a release by the outgoing tenant of his interest as joint tenant in the lease.
Rejecting this view, the Court held that the expression ‘assign’ where used in Section 41 of the Act and in clause 3.8 of the Lease includes a “transfer of the legal estate from A and B to A alone in a situation where ‘one joint tenant drops out’ ”.
Accordingly, if a lease requires landlord consent be obtained to any transfer of the lessee’s interest in the lease, then a transfer of lease between joint tenant lessees requires landlord consent.
Was consent unreasonably withheld?
As a result of Section 39 of the Act (mirrored in clause 3.8(b) of the lease), the lessor was only entitled to withhold consent to the transfer on the grounds set out therein.
On the facts of the case it was held that the lessor had reasonably required and requested information concerning the continuing lessee’s financial standing and (in breach of Section 41(1) of the Act and clause 3.8(c) of the lease) this was not provided. The Court found that the lessor had not unreasonably withheld consent.
The right to assign a lease and the procedure to be followed in order to effect the assignment and the issue whether the consent of the lessor is required are important aspects of leasing which require careful consideration by lessees and lessors.
If a lessee is intending to sell its business and needs to transfer the lease, it should provide the lessor with a reasonable time to consider the request for consent and provide at the one time all relevant information the lessor needs in order to consider the application for consent.
Please contact us if you have any queries in relation to rights and obligations in respect of assignment or consent to assignment.