ASSIGNMENT OF RETAIL LEASES: WHAT LANDLORDS AND BUSINESS OWNERS SHOULD KNOW

Author: Dominic Mason

Publish Date: January 14, 2005

If you are a lessee wishing to assign a retail lease the Landlord may refuse consent or hold you liable for future failures in performance of the lease by the assignee unless you accurately follow the procedures outlined in section 41 of the Retail Leases Act (NSW) 1994 (“the Act”).

The recent decision of the NSW Supreme Court in Indian Taj v Gilany [2004] NSWSC 1249 highlights the importance of thorough consideration of and adherence to the provisions of the Act, in particular sections 41(c) and (d), by both business owners attempting to assign a retail lease and their landlords.

The facts of this case are that Indian Taj Pty Limited (“the lessee”) was in liquidation. It held a lease over a unit in Harris Park, from which it operated a restaurant. On 23 September 2004 the liquidator caused Taj to enter a contract for the sale of the business to Win Win Recruiters Pty Limited (“the proposed assignee”) a company owned by one of the directors of Taj. Win Win already leased the adjacent unit from the same lessor.

Section 41 (c): Asking the Lessor for the Disclosure Statement

Section 41 (b) of the Act requires that:

“Before requesting the consent of the lessor to a proposed assignment of the lease, the lessee must furnish the proposed assignee with a copy of any disclosure statement given to the lessee in respect of the lease, together with details of any changes that have occurred in respect of the information contained in that disclosures statement…”

Section 41 (c) goes on to state:

“For the purpose of enabling the lessee to comply with paragraph (b) the lessee is entitled to request the lessor to provide the lessee with a copy of the disclosure statement concerned and, if the lessor is unable or unwilling to comply with such a request within 14 days after it is made, paragraph (b) does not apply to the lessee.”

In this case the solicitor for the lessee wrote to the lessor’s solicitors requesting a copy of the disclosure statement together with advice about any information in the statement had changed since it was provided originally. The lessor’s solicitors replied that they did not have such a statement in their possession. It was also established that the liquidator of the lessee had obtained a copy of the statement from another source.

The lessee argued that the provisions of section 41 (c) applied because the lessor did not comply with their request.

The Court held that

“it is only a request which is made for the purpose of enabling the lessee to comply with paragraph [41](b) that suffices to trigger paragraph [41](c)”.

The onus of establishing whether the request is made for this purpose falls on the person asserting it, in this case the lessee. The lessee had not provided any evidence on this matter. The Court was unable to infer the requisite purpose in these circumstances because there was evidence that the liquidator of the lessee did have a copy of the disclosure statement.

The Court also held that section 41(c) does not entitle the lessee to request information of any changes to the matters set out in the disclosure statement from the lessor. Therefore if such a request is made of the lessor and the lessor does not comply with it, the lessee is not absolved from providing that information to the proposed assignee as required by section 41(b).

Section 41 (d): Have You Withheld Consent?

Once the request for consent had been made by the lessee the solicitors for the lessor wrote back on several occasions stating that their client “[would] not agree to any proposed lease assignment” and that “no further consideration of any requests for assignment will be entertained” before certain issues involving the lessee’s lease and the proposed assignee’s lease were rectified to the lessor’s satisfaction.

In effect, the lessor was saying its consent was conditional upon the resolution of certain matters.

Section 41(d) states:

“The Lessor must deal expeditiously with a request for consent and is taken to have consented to the assignment if the lessee has complied with paragraphs (a) and (b) and the lessor has not within 42 days after the request was made given notice in writing to the lessee either consenting or withholding consent.”

The lessor’s solicitors argued that its letters requiring the lessee to comply with certain conditions before consent would be considered were notices in writing withholding consent. The solicitors for lessee contended that were not sufficient to comply with its obligations under section 41(d) to provide notice of consent or non-consent in writing within 42 days.

The Court agreed with the lessee. However, as the lessee had not complied with paragraphs (a) and (b) the Court held there could be no deemed consent.

The Court stated that to satisfy 41(d) the lessor must, in writing, “give a notice which says, in substance, either, ‘I consent’ or ‘I decline to consent’. Statements requiring certain conditions to be met before a decision to consent or not to consent is made are not sufficient to prevent a deemed consent arising 42 days after the original request.

Conclusion

This decision has important practical implication for both lessors and lessees with retail leases.

Lessees must be aware that a request to a lessor for the original disclosure statement must be made for the purpose of complying with section 41(b). The rights provided by 41(c) are not available to lessees if they are able to comply with 41(b) regardless of the lessor’s ability to provide the disclosure statement.

The decision also makes clear that the onus of providing information updating the disclosure statement falls on the lessee, not the lessor, and a failure by a lessor to respond to a request for updated information will not trigger the lessee’s rights under 41(c).

Lessors must be aware that where a request is made for consent to an assignment of a retail lease, they must provide a definite and unconditional answer within 42 days. This may raise problems in circumstances similar to the current case, where a lessee is in breach of the lease. One suggested course of action in such a situation is for the Landlord to refuse consent, giving its reasons, and state any further requests will also be refused until the matters are resolved.

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