An easily overlooked element of a commercial business sale is that of assigning the existing lease, which is key in enabling the buyer to continue operating the business in the same premises where the seller currently resides. While the steps involved, in assigning the existing lease, may be relatively straightforward the time and effort in meeting the legislated disclosure requirements can become a hefty hurdle when approached haphazardly.
Under the Retail Shop Leases Act 1994 (Qld) (‘The Act’), there are a multitude of time specific disclosure requirements to be undertaken by the seller (Lessee/Assignor), the buyer (Prospective Tenant/Assignee), and the landlord (Lessor) to ensure the assignment is binding. A failure of any party to meet these disclosure requirements within the specified time periods may result in an unenforceable agreement, entitling the Buyer or Landlord to terminate the assignment of lease, leaving the Seller high, dry and in breach of the sale contract.
With adherence to these disclosure details and time frames required under all retail shop leases (defined in section 5A of The Act), it is highly advantageous for all retail business owners to have at least a basic understanding of what is expected when seeking an assignment of your lease.
Generally speaking, when entering into a retail shop lease, the key questions and considerations made by a business owner typically focus on matters that directly impact the daily operations and profitability of their business, such as:
- The Costs:
- onboarding costs of bond, prepayment of rent, solicitors, insurances, fit-out, etc
- day to day costs of rent, outgoings, maintenance (including air-conditioning servicing), etc
- The length of the lease period and whether further options are available;
- Any building covenants or restrictions on use of the premise; and
- Consideration of instances where a ‘force majeure event’ such as Covid-19, or extensive damage to the property, as evidenced by the recent floods, results in it becoming unusable for the initially leased purpose.
While all of these elements are at the core of what could make or break a business’ success in a leased space, an important aspect that can be easily overlooked by a new Lessee are the steps required in assigning a lease when the time comes to sell their business.
Understandably, the last thought on a new business owner’s and/or prospective lessee’s mind is related to selling the business. However, knowing in advance what is involved to transfer a lease may be the key to avoiding missteps, unexpected delays, and unnecessary costs impacting the business owner’s sale proceeds or even leading to the potential collapse of the contract of sale.
The steps, while easy enough to be managed with sufficient planning and time, when rushed can be time consuming and unexpectedly burdensome to an unprepared Lessee simply looking to get the best price from the sale of their business.
Disclosure Requirements under the Act
As required under the Act, the following disclosures need to be completed to assign a lease in Queensland:
- The Lessor must complete a “Lessor disclosure statement to Assignee”, which provides details of the Lease and other relevant tenancy details.
2. The Assignor must complete an “Assignor disclosure statement to Assignee”, which outlines details of the lease and other relevant tenancy details.
a. With it, the assignor must provide a copy of the Lease, and any amendments and/or previous assignments.
b. This disclosure is to be provided a minimum of 7 days prior to the Assignor requesting the Lessor’s consent to the assignment of the lease unless a waiver is provided.
3. The Assignee must complete an “Assignee disclosure statement to Assignor” which requires disclosure of relevant details of the Assignee to facilitate the Lessor’s assessment of whether they are a fit and proper lessee.
a. This disclosure must also be provided a minimum of 7 days prior to the Assignor requesting the Lessor’s consent to the assignment of lease.
4. The Assignee must complete an “Assignee disclosure statement to Lessor”. Part of this disclosure requires a duly executed Legal Advice Report and Financial Advice Report.
a. These two reports are to verify that the Assignee has received the relevant legal and financial advice prior to agreeing to consent to the assignment of the existing Lease.
b. It should be noted that these reports are not necessary for a “Major Lessee”, that being a Lessee / Assignee who is a lessee of 5 or more retail shops in Australia.
As noted above, in lieu of meeting the required 7-day minimum disclosure periods, a Waiver Notice (waiver) may be provided by the relevant party. In providing a waiver, a Non-Major Lessee must also produce a legal advice report verifying that they have received legal advice regarding the implications of their waiver.
Once all the above have been provided in accordance with the relevant time periods or accompanied by a waiver, a Deed of Assignment can be executed by all parties to the lease. This deed will generally outline the conditions upon which the buyer will be taking over the existing lease, including binding them to the existing lease in place of the assignor, as well as outlining the obligations of the assignor (if any) upon completion of the assignment.
Why go through the trouble?
Beyond being a legislative requirement to ensure the assignment is legally binding, a major benefit that results from adherence to The Act’s assignment disclosure requirements is brought about through section 50A. Section 50A releases an assignor (and any existing guarantor/s) from all liabilities or obligations that arise under the lease after the date of assignment, regardless of the terms contained within the Deed of Assignment. It is this specific section that makes all of the assignor’s efforts in adhering to the Act’s disclosure requirements worthwhile, as it effectively provides the assignor with a legislative release from all future lease liabilities post-assignment date.
While the extent of information required to meet the above disclosure requirements will differ depending on the parties involved, considerable time and resources will likely be exhausted in ensuring all elements of the above steps are met. Specifically, if a seller is not sufficiently prepared, the time required for parties to collect information, receive legal and financial advice, ensure all documents are duly formatted and executed and the eventual protracted correspondence between all parties, can easily result in key dates being missed or delayed, putting the entire business sale at risk of collapse.
Although an assignment of a lease may only be a small portion of a business sale, due to the number of steps requiring prudent action from all parties involved, there are ample opportunities for unexpected delays to occur. By knowing in advance what is required to complete these steps, a Seller can take early action to ensure all required information is prepared, easily accessible, and ready for production as soon as possible in the sale process.
If you are looking to buy or sell a business or are looking to enter into or renew a lease, our team can assist in ensuring you are prepared in advance and your interests are protected.