Selling Your Franchise or Offloading Your Company Store – Can Your Landlord Block an Assignment of Lease?
Assisted by Jason Vo
Have you ever experienced that heart-stopping moment where you have tried to sell your franchise or sell a company owned store and your landlord has attempted to object to your assignment of lease – blocking offers for one of the most important aspects of the goodwill of the business?
Before I explain what a franchisee can do in this situation, allow me to first explain what an assignment of lease actually is.
What is an Assignment of Lease?
An assignment of lease is when you, the lessee, transfer a lease to a new lessee. You then become the assignor and the new lessee becomes the assignee under an assignment of lease.
So, what is the current law in New South Wales regarding assignment of leases?
The Legislative Landscape
As the name suggests, the Retail Leases Act (the Act) governs leases involving retail shops.
If you want to assign your interest in the lease to a third party, you will need to obtain consent from the lessor. Under the Act, the lessor can withhold consent in limited circumstances, such as if the proposed assignee has inferior financial resources or retailing skills to the proposed assignor (yourself.) The lessor can also refuse consent if you don’t comply with the procedure for obtaining consent to assignment, as required by the Act.
However, if you do obtain consent in the correct manner, and the proposed assignee doesn’t have inferior financial resources or retailing skills to you, it will be difficult for the lessor to refuse consent.
Further, depending on your specific situation, the Conveyancing Act may also apply, particularly if your lease contains a covenant, condition, or agreement against assigning.
The case below provides useful guidance on interpreting the Act and has significant implications for lessees in particular.
Bar Machiavelli Pty Ltd (Administrator Appointed)  NSWSC 1395
Bar Machiavelli Pty Ltd (Administrator Appointed), the tenant, operated a bar and restaurant at leased premises at Rushcutters Bay from the landlord, WFM Motors Pty Ltd.
On 12 June 2018, Ms Toppi, the sole director of Bar Machiavelli, appointed a voluntary administrator to the company. Two parties, Bicher & Son Pty Ltd and Ms Toppi, made proposals for deeds of company arrangement (DOCA proposals), with both involving a proposed assignment of lease.
The voluntary administrator was unable to recommend the more beneficial DOCA proposal from Bicher because the landlord refused to consent to the assignment of lease on the grounds that it considered Bicher’s financial resources and retailing skills to be inferior to the original tenant, Bar Machiavelli. The landlord also claimed that the lessee didn’t comply with the procedure for obtaining consent to assignment.
Bicher took the landlord to court to argue that there weren’t valid grounds for withholding consent, thus allowing the administrator to recommend Bicher’s DOCA proposal to the creditors of Bar Machiavelli.
Outcome of the Case
Bicher’s financial resources were “unaudited and imperfect” however, they weren’t inferior to those of the assignor for the following reasons:
- Bicher had consistent net operating profits and net assets for the financial years ending June 2016 to June 2018; and,
- Bicher had no overdraft and there was no evidence to suggest that it failed to pay creditors on time, as opposed to Bar Machiavelli which was insolvent with an estimated deficit of $1,413,366.
The lessor, WFM, did receive a request for consent to the proposed assignment. After receiving the letter, WFM failed to request information they may have reasonably required to be satisfied that the financial resources and retailing skills of the proposed assignee weren’t inferior to those of the lessee. As a result, the lessee did not have to provide further information and did not fail to comply with the procedure for obtaining consent to assignment. Accordingly, the lessor wasn’t entitled to withhold its consent to the assignment of the Lease by Bar Machiavelli to Bicher. Read more about this case.
Different Legislation in Other States and Territories
If you’re a franchisee who leases stores in other states, you should consider the different retail leasing regimes in each state and territory to make sure that your sale goes smoothly.
For example, South Australia’s Retail and Commercial Leases Act is similarly worded to New South Wales’, with limited circumstances in which the lessor has grounds for withholding consent to an assignment of lease.
Whereas Western Australia’s Commercial Tenancy (Retail Shops) Agreements Act works in a different manner. There, the lessee is entitled to withhold consent, but it is subject to the lessor’s right to withhold consent only on reasonable grounds. After receiving a request for assignment, if the lessor doesn’t give notice in writing of whether they consent or withhold consent, then it is taken that consent is given.
What Happens if your Franchise in NSW isn’t Governed by the Retail Leases Act?
Where your lease is not governed by the Act (such as a commercial lease) you may want to handpick provisions relating to an assignment of lease. For example, there is a risk where there is a provision requiring a test for an incoming tenant that compares their resources to the assignor if they don’t have comparable resources.
If you’re leasing a retail shop, the grounds on which consent to an assignment of lease can be withheld is limited to certain circumstances under the Act. The lessor cannot withhold consent to you assigning the lease if the proposed new tenant’s financial resources or retailing skills are not inferior to yours, and if you have complied with the procedure for obtaining consent to assignment.
If you’re seeking to assign the lease of an interstate premises, it’s important that you consider the legislation of different states as some operate differently to NSW. It is essential that you review your lease, particularly provisions about an assignment of lease, to ensure that you are not in a situation where you are precluded from selling to potential buyers, particularly where your lease is not protected by the Retail Leases Act.
If you’re thinking of selling your franchise or offloading a company owned store, I am happy to review your lease and help you look over your assignment of lease provisions. If you are negotiating a lease it is also essential that you seek legal advice to ensure your assignment provisions work for you!
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