Retail Leases – When can a landlord refuse consent to assign?

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September 2018

Retail Leases – when can a landlord refuse consent to assign?

The recent Victorian Consumer & Administrative Tribunal (VCAT) decision of AVC Operations Pty Limited v Teley Pty Limited [2018] VCAT 931 (Bush Inn Hotel Case) is a reminder highlighting the limitations on Landlord’s ability to refuse consent to an assignment of a Retail Lease.

Summary of key points

Landlords must:

  • act “reasonably” if they are seeking to refuse consent to an assignment of a retail lease, based on insufficient financial resources.
  • take into account the financial resources of the proposed new tenant and also any of its related entities.
  • give some weight to personal and corporate guarantees by related parties, even if those related parties do not own any assets.

When can a retail Landlord refuse consent?

Section 60 of the Retail Leases Act 2003 (VIC) (Act) sets out the limited circumstances in which a Landlord can refuse to consent to a request to assign a retail lease.  Section 60 provides that a Landlord can only withhold its consent to an assignment in one or more of the following circumstances:

  • If the proposed use of the retail premises by the new tenant is not permitted under the lease;
  • If the Landlord considers that the proposed new tenant does not have sufficient financial resources or business experience to meet the obligations under the lease;
  • If the current tenant has not complied with any reasonable assignment provisions of the lease; and
  • If the assignment is connected with the continued carrying on of an ongoing business and the current tenant has not provided the proposed new tenant with business records for the previous 3 years, or such shorter period as the business has been carried on at the retail premises.

Even though the words of Section 60 would appear to be clear, it has previously been held that because the purpose of the Act is aimed at protecting tenants who generally have less negotiating power in the tenant/landlord relationship, the reference to when the Landlord “considers” that the proposed new tenant does not have sufficient financial resources or business experience to meet the obligations under the lease, must be construed as requiring the Landlord to “reasonably” consider or act “reasonably”.

There are provisions in corresponding other state retail lease acts, for example, Section 39 of the Retail Leases Act 1994 (NSW).

The Bush Inn Hotel Case

In the Bush Inn Hotel Case, the tenant had entered into an asset sale agreement with the proposed new tenant.  The tenant sought the Landlord’s consent to an assignment of the lease.  The Landlord sought to refuse consent to assignment based on the proposed new tenant’s insufficient financial resources.  The Landlord asserted that it considered the proposed new tenant did not have sufficient financial resources to meet the obligation of the lease.

The question for VCAT was whether the Landlord was entitled to refuse consent on this basis and whether it was “reasonable” for the Landlord to refuse consent.

Although the proposed new tenant was a newly established entity, its directors were experienced publicans and were directors of another company which operated other successful hotels.  Whilst the Landlord did not dispute the business experience of the proposed new tenant, the Landlord came to the view that the proposed new tenant did not have sufficient financial resources and relied on this view to refuse to consent of the assignment of the lease.

VCAT accepted that, in many cases, a Landlord may be reasonably justified in withholding consent to the assignment of a lease to a corporate entity which has no trading history, and where the persons standing behind that corporate entity have no personal assets or experience.

However, VCAT held that this case was different.  It was conceded by the Landlord that the persons standing behind the proposed new tenant are capable and long standing publicans.

VCAT held that it was relevant to take into account the financial standing of the related entity which ran other successful businesses.  In addition, VCAT held that a Landlord cannot overlook personal guarantees offered by directors merely because they have no personal assets and that it was reasonable to assume that business people would take considerable steps to avoid judgment against them in circumstances where they have guaranteed the obligations of another entity.  Accordingly, some weight was required to be given by a Landlord to such offers of personal guarantees.

Consequently, VCAT held that it was not satisfied that the Landlord was acting “reasonably” in refusing to consent to the assignment.  Accordingly, VCAT made orders the Landlord was not entitled to withhold consent and that the current tenant was entitled to assign its interests under the lease to the proposed new tenant.

Conclusion

The Bush Inn Case highlights that a Landlord may only refuse to consent to the assignment of a retail lease based on business experience or financial resources, if the Landlord is acting “reasonably” in the whole of the circumstances.  Landlords must consider the financial standing of related entities and there is some weight to be given to director’s guarantees and related entity guarantees, even if those parties do not hold assets in their names.

Craig Higginbotham

5 September 2018

By | 2018-09-05T08:39:03+00:00 September 5th, 2018|Business, Leasing, Property, Retail|Comments Off on Retail Leases – When can a landlord refuse consent to assign?