In certain cases, a tenant can choose to exit their commercial lease prior to the end of their lease term by either transferring or assigning the lease to another party, known as the assignee. Transfers or assignment of leases require explicit permission for this mechanism in the original lease. Assuming it does exist however, this scenario usually occurs when a tenant sells their business to another party (who agrees to accept the current lease rather than entering into a new one with the landlord), or when a tenant wishes to exit their lease and finds a party willing to take on the existing lease.
Process of transferring a Commercial Lease
The first steps involved in exiting a commercial lease and considering assignment include:
- Reviewing the current lease to determine whether it can be transferred or assigned;
- Determining what requirements must be fulfilled to obtain the landlord’s consent; and
- Communicating with the landlord to obtain their consent to be able to assign the lease.
The landlord must approve of the proposed tenant whom the existing tenant wishes to assign the lease to. The landlord will determine their approval by assessing whether the new tenant can pay rent as well as deciding if the new tenant is the appropriate fit. A landlord will generally ask that the proposed new tenant provides both financial and business references to perform this assessment.
Deed of Assignment
Once the landlord’s consent is obtained, a legal document known as a deed of consent and assignment will be developed. The deed of consent transfers all obligations of the current tenant under the existing lease, to the new tenant.
A deed of consent includes:
- Confirmation of the landlord’s consent to transfer the lease
- An agreement from the existing tenant to transfer their entire interest in the lease to the new tenant. This will include a specified date of transfer (date of assignment)
- The new tenant agrees to undertake all rights and obligations of the lease from the date of transfer.
The Current Tenant
For the successful transfer of a commercial lease, the current tenant must be relieved from all rights and obligations under the lease from the specified transfer date. To ensure this occurs:
- A deed of assignment will legalize the tenant’s relief from any claims or liabilities under the lease, from the date of transfer.
- Any security provided by the exiting tenant will be refunded.
It is important to remember that the tenant is bound to the terms of the lease and is required to fulfill their obligations until the completion of the deed of assignment and subsequent formal transfer of the commercial lease.
The Proposed New Tenant
The proposed new tenant’s approval to take on the commercial lease is dependent on the landlord’s acceptance of the lease transfer. This approval is specified in the deed of assignment whereby the landlord accepts the proposed new tenant as assignee from the specified date of transfer. Prior to entering the commercial lease, there are a number of things that the incoming tenant should consider. These include:
- Reviewing the contents of the existing lease prior to signing the deed of assignment
- Ensuring that the terms of the lease are reasonable and that sufficient security and tenure is provided
What happens if the lease being transferred is a Retail Lease?
If the lease being transferred takes the form of a retail lease, the tenant will be required to give the new tenant (assignee) a disclosure statement. A disclosure statement will detail any changes agreed to by the landlord during the duration of the lease.
The disclosure statement provides the assignee with information that is essential to consider including:
- The terms of release and any renewal options;
- proposed commencement date of the lease
- details of the premises;
- the requirements to use the premises;
- Annual base rent payable under the lease; and
- Outgoings payable under the lease
A tenant is entitled to request an up to date disclosure statement prior from the landlord, prior to transferring the commercial lease. The landlord has an obligation to fulfill the tenant’s request. This must be provided within a specific time frame, usually 14 days after the tenant makes the request.
Failure to provide a disclosure statement may result in consequences. However, these consequences often differ between states and territories. Consequences may include:
- The assignee withholding their rental payment;
- The assignee seeks compensation from the landlord; or
- The assignee terminates the lease prior to the end of the lease term.
Parties entering into a commercial lease must be aware of the specific requirements and consequences of disclosure statements, within their particular state.
Do you need to pay stamp duty?
In NSW it is essential that you pay stamp duty upon assigning a commercial or retail lease. Stamp duty is a tax imposed on the purchase of assets and transactions of property. The value of stamp duty required to be paid depends on whether there is any money involved in the transfer.
Should the commercial lease transfer not involve any form of monetary payment, the exiting tenant is still required to pay the NSW Office of State Revenue a nominal $10 fee. It is essential that this stamp duty fee is paid to ensure that the transfer is accepted.
Failure to pay this nominal stamp duty will delay the transfer of the commercial lease.
What to take away from this article?
A tenant who wishes to exit their commercial lease can either transfer or assign this lease. It is essential that the tenant is aware of their rights and obligations under the lease and the process involved with transferring the lease to a proposed new tenant. Additionally, it is important to consider that a transfer requires the approval and consent of the landlord. Should the transfer take the form of a retail lease, there are a number of additional requirements that need to be fulfilled, including a disclosure statement. To ensure a smooth commercial lease transfer, it is imperative that you familiarise yourself with a deed of assignment and the requirements necessary for it to be satisfied.
If you have any questions regarding the transfer or assignment of a commercial lease or require assistance with any aspect of commercial property, get in touch with us via the contact form or by calling 1300 337 997.