How Reasonable Must I be? A Guide for Landlords
Landlords may be reluctant to allow a transfer to occur as they don’t feel comfortable with dealing with a new tenant. But what can they do to fight the transfer?
An assignment/transfer of lease generally occurs in the following scenarios:
- When the tenant grows out of its premises and has found a better premises midterm;
- When the tenant has financial difficulty but the premises is a good location; and
- Usually, the most prevalent, when the tenant sells its business.
Most leases will contain a provision to the effect of “the landlord must not unreasonably withhold consent to a transfer of this lease if the proposed transferee or subtenant proposes to use the premises in a way permitted under the lease”.
The question is: what does this actually mean in the context of a retail premises lease? The answer, as set out below, is not as simple as you may think…
Retail Leases Act
Section 60 of the Retail Lease Act 2003 sets out that a landlord is only entitled to withhold consent to an assignment of a retail premises lease if one or more of the following applies:
a) The incoming tenant is proposing to use the premises for a purpose not permitted under the lease;
b) The landlord forms the view that the tenant doesn’t have sufficient financial resources to meet its obligations under the lease;
c) The incoming tenant has not complied with reasonable assignment provisions; and/or
d) If the assignment of lease is in connection with the continuation of an ongoing business at the premises and the outgoing tenant has not provided the landlord with business records for the previous three years to the incoming tenant.
If a Landlord wants to object to an assignment they have a strict timeline in which to do this.
Landlords need to ensure that they do not act unconscionably and carefully review the above to make sure that their objection is made in writing within the time required by the Act and the objection is legally supportable. Otherwise, the landlord might find themselves in the Victorian Civil and Administrative Tribunal.
Common Law Principles
At common law, the assignor has the right to transfer contractual rights to a third party (the assignee), without the consent of other parties to the contract (except in rare situations where the rights are non-assignable).
The withholding of consent must be “objectively reasonable” in the particular circumstances, but the terms and proper construction of the relevant lease are paramount. “Reasonableness”, in this context, is assessed by an objective standard and is given a broad and common sense meaning.
Decisions to withhold consent should be based on factors “relevant” to the lease. Such “relevant factors” will differ in each case and heavily depend on the particular circumstances including the nature and object of the specific lease and the purpose of the clause prohibiting the “unreasonable” withholding.
Relevant factors may include:
a) any defaults in obligations under the lease; or
b) the solvency, financial position or identity of a party.
A party’s actions in withholding consent will generally be considered “unreasonable” if the grounds relied upon to support the withholding are:
extraneous or disassociated from the subject matter of the lease;
materially inconsistent with any provisions of the lease; or
based on collateral or improper considerations.
Leading High Court Authority on “reasonableness”
The leading High Court authority considering “reasonableness” and withholding of consent (albeit, that this case did not consider the issue of limiting common law assignment) is Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596; 26 ALR 567.
In Secured Income, a contract for the sale of land provided that all leases of the premises after the contract’s execution should be approved by the purchaser, but that approval was not to be “capriciously or arbitrarily withheld”. Mason J (with whom Gibbs, Stephen and Aickin JJ agreed):
held that “arbitrarily” connotes “unreasonably” in the sense that what was done was done “without reasonable cause” on the issue of what constituted “unreasonableness”, adopted an earlier statement of Walsh J that “the reason for refusal must be something affecting the subject matter of the contract which forms the relationship between the landlord and the tenant, and not something extraneous and dissociated from the subject matter of the contract” (citing Colvin v Bowen (1958) 75 WN (NSW) 262, [264])
Lessons for Landlords
Get legal advice as soon as the request for consent is sought. Most leases will alllow the landlord to recover their legal costs from any request for consent of an assignment.
- Ask for further information from the prospective tenant on its financial position and business expenses;
- If the landlord has a right under the law to refuse consent, consider whether additional obligations (such as a personal guarantee or higher security deposit) will deal with the problem;
- Make sure any objection is based on law and after all information has been elicited from a landlord.
Be mindful that in many occasions concerning a sale of business, a tenant and the guarantor will be released under the lease by virtue of compliance with the Act, irrespective of what is said on the lease or transfer document.
For expert advice on retail leasing matters contact Frank Tisher or a member of our Retail Leases expert team.
