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Obtaining a Landlord’s consent – assignment of a lease

Friday, 25 May, 2012

Where a lease requires the tenant to obtain the landlord’s consent, the Property Law Act 2008 says that the landlord cannot ‘unreasonably’ withhold or delay that consent.  Any considerations or obligations to consent set out in a lease must also be reasonable.

Under most leases a tenant will require landlord’s consent to undertake alterations, change the use of the premises or assign the lease to a new tenant.  If a tenant does not obtain the landlord’s consent to these matters, or any other matters that the lease specifies needs landlord consent, the tenant will be in breach of the lease.

Assignment of lease

If a tenant wants to sell its business or no longer wants to trade from the current premises then the tenant cannot terminate the lease unless the lease term is at an end.  Therefore the tenant may need to assign the lease to a purchaser of the business or a new tenant.  Assignment requires landlord’s consent.

Upon the sale of a business it is a condition of the usual agreement for sale and purchase that landlord’s consent to the assignment of the lease to the purchaser is obtained.  Many people assume that this is a rubber stamping exercise, but new tenants need to be prepared.  It will be easier for a landlord to make a faster decision if the landlord is provided with relevant information at the time of the application for consent.  An application should include information on the purchaser of the business or the new tenant and guarantors, including a CV or work experience details (especially business or industry experience), financial statements of assets and liabilities, and evidence of the character of the purchaser.  Obviously this information needs to be provided by the new tenant.  The application needs to show the landlord that the prospective new tenant has the skills and finance to pay rent and run a profitable business from the premises.

The application for consent in relation to long term and complex leases will need to be more thorough.  In particular motel leases are generally a 10 to 25 year term and the tenant has very high obligations as to business conduct, profit goals, repairs and maintenance.  A motel lease is usually not just for the premises, but for the motel business and that business’s goodwill and income stream.  Therefore the information the landlord needs may include a Police check, a face to face meeting, credit checks, references, or mandatory industry experience, in addition to the standard requirements set out above.

A landlord will insist on a written deed of assignment to bind any new guarantors into the lease obligations.  It is also prudent for the new tenant to have the assignment in writing, to provide certainty as to the landlord’s consent.

Assignment without landlord’s consent

If a tenant assigns without landlord consent the Property Law Act 2008 states that the assignment will take effect and a new landlord–tenant relationship is created immediately on assignment.  This is helpful to a landlord, as the new tenant will be bound by the lease terms, and the landlord can take action directly against that new tenant if necessary.  That does not mean that the previous tenant is off the hook.

In most situations, the terms of the lease will still require a tenant to obtain landlord consent to an assignment and therefore without it the tenant is in breach of the lease. The landlord has the right to take action against a tenant for breaching the lease.

Ongoing liability

After assignment of the lease the old tenant and any guarantors remain liable under the existing terms of the lease until the lease terminates, is varied or renewed beyond the original lease renewal rights.

Landlord’s obligations

Where a lease requires the tenant to obtain the landlord’s consent, the Property Law Act 2008 says that the landlord cannot ‘unreasonably’ withhold or delay that consent. This obligation cannot be amended in the lease document and the only way a landlord can avoid giving consent to a ‘reasonable’ request is for the lease to expressly prohibit any right of assignment.

A landlord may still withhold consent, but the landlord’s decision will always be open to review and the tenant can request that the landlord provide reasons for refusing or for imposing obligations or pre-obligations.  Obtaining the reasons for a decision may then put the tenant in the position of having to make a further application to the landlord that addresses the issues raised by the landlord, and the landlord will be required to  consider the application again.

The test of what is ‘reasonable’ is what a reasonable person would do in the circumstances.  The landlord is entitled to make a decision based on the application presented by the tenant which is why the information provided to the landlord is important.  The landlord must give full consideration to the circumstances of which that landlord is aware.

A landlord cannot ask for a consent payment or an “improper amount” from the outgoing or new tenant.  As the tenant is contractually bound to pay rent, rates and other outgoings the landlord can ask that any outstanding monies are paid prior to the assignment but the landlord cannot ask for an assignment payment or any additional obligations for the old tenant and new tenant.  The tenant will also be liable for the landlord’s reasonable costs in assessing the application for consent.  Those  costs should be kept down if the landlord is provided with sufficient information at the start of the process for them to make a quick decision.

If a person (the Property Law Act 2008 does not specify just the tenant) suffers loss because the landlord withheld or delayed consent unreasonably, then that person may be able to recover damages against the landlord.

Conclusion

As a tenant, do not assume that obtaining landlord consent is a rubber stamping process.  A landlord must act reasonably to come to a  decision on the basis of the circumstances and the application that the tenant makes.  Therefore the information provided to a landlord when making a request for consent is very important, and if it is comprehensive will make it easier for the Landlord to make a decision quickly.

A landlord must act reasonably in coming to a decision and the tenant can review that decision.  A landlord, therefore, needs to have legitimate reasons for withholding consent.  As always, good communication will usually ensure that the consent process works for both parties.

For further information please contact:

Sandra Braithwaite
Phone: 07 834 4664
Email:   sandra.braithwaite@harkness.co.nz