Assignment of Retail Leases – What you should know
Individual & Business Law, Retail
Often during the term of a retail lease, instances occur that the tenant under the lease is forced to assign its lease agreement
to a third party, either because of a sale of business or otherwise.
The statutory regime governing retail leases in New South Wales is the Retail Leases Act 1994 (NSW) (Act), refer to Sections 39
and 41 for proposed assignment of lease .
Section 39 of the Act sets out the circumstances in which a landlord may withhold its consent to an assignment of a lease.
The section states that:
The lessor is entitled to withhold consent to the assignment of a retail shop lease in any of the following circumstances, and is not entitled to withhold
that consent in any other circumstance:
1. If the proposed assignee intends to change the use to which the shop is zoned.
2. If the proposed assignee has financial resources or retailing skills that are inferior to those of the proposed assignor.
3. If the lessee has not complied with section 41 (procedure for obtaining consent to assignment).
4. The circumstances set out in section 80E (relevant only for retail leases in an airport).
Section 41(a) of the Act is commonly inserted in its entirety into leases as this section sets out the procedure that the tenant
must follow when applying for consent to assign the lease.
A request for the lessor’s consent to an assignment of the lease must be made in writing. The lessee must provide the lessor with relevant information
that represents the financial standing and business experience of the proposed assignee.
A tenant also needs to be aware of section 41(b), which relevantly states 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 disclosure statement since it was given to the lessee (being changes of which the lessee is aware or could
reasonably be expected to be aware).
It is also important to note that if the landlord has not granted or withheld consent within 28 days , then there is a deemed consent
to the assignment under section 41(d)(ii) of the Act, provided sections 41(a) and (b) have been satisfied and the circumstances under section 39 do not apply.
The case of Lockrey v Historic Houses Trust of New South Wales  provides a timely reminder to landlords of how to properly deal with a request to
assign a lease from a tenant.
Lockrey (L) and Shelhot (S), were the joint tenants under a retail lease of the MoS caf in the Sydney CBD. S agreed to sell
his share of the cafe to L and both S and L executed a transfer of the lease to L alone, as transferee. L applied to the landlord, the
Historic Houses Trust of NSW (HHT) for its consent to the assignment.
The lease contained a clause that was almost identical to the requirements of section 41 of the Act.
Over the next 2 years there was sporadic correspondence between L and HHT. In answer to the initial request for consent to the assignment of the lease
made by L, HHT requested the following information pursuant to section 41(a) of the Act:
verifiable information regarding L’s financial standing;
a detailed proposal as to how L proposed to clear his current indebtedness;
a statement regarding L’s proposed strategies to avoid future indebtedness.
The consent to the assignment of the lease was never provided by HHT.
L initiated proceedings in the Supreme Court seeking declarations that HHT had unreasonably withheld its consent to the transfer of the lease and that
L and S were entitled to transfer the lease to L.
Supreme Court decision
The Supreme Court held that HHT was correct in withholding consent to the assignment.
Stevenson J found that, HHT acted reasonably in its request for financial information from L
under Section 41 of the Act and that the request was never withdrawn or altered.
As L never complied with the request, the Supreme Court found that HHT was entitled to
Court of Appeal decision
The Court of Appeal set aside the decision of the Supreme Court finding that the request for verifiable information regarding Mr Lockrey’s
financial standing did not comply with Section 41 of the Act and was too general. HHT’s request did not identify the particular
information it required but left it to the recipient of the request to determine every conceivable fact concerning L’s financial standing.
The Court of Appeal found that the request by HHT lacked the fundamental quality of specificity to which a tenant was entitled to expect.
As HHT had not met the requirements of Section 41 of the Act, consent was deemed to have been given and L and S were entitled to assign the lease.
The Lockrey case emphasises the need for landlords to deal promptly and specifically with requests from tenants when it comes to a proposed assignment of lease.
If you are interested in learning more about this topic, Madison Marcus Law Firm can assist. We are a highly skilled group of legal professionals that
specialise in Property Law and Retail Leasing, Franchising and Commercial and Corporate Litigation.
Please feel free to contact Bechara Shamieh, Director on 02 8022 1222 to discuss.
Madison Marcus Law Firm produced this article. It is intended to provide general information in summary form on legal topics, current at the time of first publication.
The contents do not constitute legal advice and should not be relied upon as such. Formal legal advice should be sought in particular matters.
The Retail Leases Act 1994 regulates the relationship between landlords and tenants of retail shops. The Retail Leases Amendment (Review) Bill 2016 has been passed by Parliament to amend the Act on limited issues.
Disclosure of outgoings
The Bill streamlines and clarifies the landlords’ disclosure obligations to increase certainty in the deal. Tenants will not be liable for financial obligations that have not been disclosed before the lease was entered into.
The only exemptions are new statutory charges that arise under legislation after the landlord’s disclosure statement has been provided. The tenant will be liable if a general obligation to pay statutory charges had been disclosed to them.
The Bill introduces a requirement for leases of more than three years to be registered. This amendment will increase certainty for tenants and protect their rights if ownership of the property is transferred.
Registration will also provide tenants with access to market information from the land titles register to improve decision making.
Executed copy of the lease
Landlords will be required to provide tenants with an executed copy of the lease so that tenants have evidence of their deal. The timeframe for providing the copy has been aligned with the timeframe for registration to enable both processes to be performed simultaneously, with exemptions for delays beyond the control of the landlord.
Removing the minimum five year term
The Bill repeals the minimum five year lease term to allow parties flexibility in determining the length of a retail lease. This amendment will reduce red tape for landlords and tenants.
Regulation for the return of bank guarantees will be introduced that prohibits landlords from holding on to bank guarantees for more than two months after a tenant has discharged all obligations under a lease.
Online bond scheme
The Bill makes changes to the operational provisions of the Retail Bond Scheme to transition it to a digital platform in 2017.
Specialist retail valuers
The Bill transfers the administrative process for appointing specialist retail valuers (who determine market rent) from the NSW Civil and Administrative Tribunal (NCAT) to the Office of the NSW Small Business Commissioner (OSBC) and increases the number of valuer industry associations identified in the Act.
The amendment will enable criteria to be developed in consultation with industry for the training and experience requirements for specialist valuers.
The Bill consolidates and streamlines the provisions that govern assignment of a lease to make the process easier and clearer. It includes additional limitations from the landlords’ obligation to consent to the assignment of a lease relating to the requirements of a public tender process.
The Bill prohibits collection by landlords of a tenants’ turnover data from online sales where goods or services are not collected or provided from the shop or shopping centre where the transaction takes place while the customer is at the retail shop. The amendment ensures that any turnover data collected must be connected to the bricks and mortar shop.
Increased access to justice
The Bill increases the financial jurisdiction of NCAT from $400,000 to $750,000 and enables NCAT to rectify a lease or disclosure statement and make orders for compensation.
Clarification of existing provisions
The Bill removes the unnecessary exemption from the Act of premises located in an office tower and clarifies that only retail shops come under the operation of the Act. This will ensure that the application of the Act applies as originally intended, to retail leases, which are defined as any agreement under which a right of occupation of premises is granted for the predominant use as a retail shop. Retail shop businesses are specified in the Act (in Schedule 1) and also include businesses located in retail shopping centres.
Office towers located above shopping centres or shopping arcades, are clearly distinguished from shopping centres, and therefore, will not be captured by the operation of the Act.
The Bill clarifies that demolition clauses in leases can only be used for demolition or renovation proposed to a building, or part of a building, where the demolition or renovation cannot be carried out practicably without vacant possession.
Industry code of practice
The Act will not regulate of the collection and use of tenant’s turnover data from sales and occupancy costs. This has been addressed through a voluntary code of conduct,Retail Code of Industry Practice—The Reporting of Sales and Occupancy Costs, which has been negotiated by industry to address information asymmetry.
Signatories to the code (namely the Australian Retailers Association, the National Retail Association, the Pharmacy Guild of Australia and the Shopping Centre Council of Australia) represent parties to retail leases inside large shopping centres.
Enquiries about the code should be directed to the code’s signatories named above.