There are differing reasons a tenant may wish to surrender or assign their lease. If this does occur, the tenant should carefully consider their options and seek professional advice.
It is important for anyone who is currently in (or even thinking about entering) a lease to be aware of what may happen if the venture does not turn out as expected, or if they wish to sell their business. In such circumstances, surrender or assignment deeds are required to be executed. It is essential each party’s rights and obligations are clearly established and understood.
Please note that this Blog should not be constituted as legal advice and the reader should obtain their own independent legal and or financial advice.
Surrendering a Commercial Lease
Fundamentally, a surrender of lease is an agreement between the Lessor and Lessee to extinguish the lease at an agreed date for a consideration, whereby it is mutually agreed to prematurely bring the lease to an end, prior to original expiry. Surrender of leases are formal legal deeds and need to be executed by both parties and in certain circumstances, registered on title.
By surrendering a lease, any outstanding tenant’s existing obligations, including rent or other charges, will need to be paid prior to surrender as well as any surrender fee.
A deed of surrender may include a financial settlement (e.g., six months’ rent paid in advance) and other obligations such as dealing with the make good provisions. All outstanding costs, obligations and liabilities should be allocated to the party who will bear the onus of completion.
Once the surrender is executed and contractual obligations are fulfilled, the previous tenant will no longer be party to the lease and no commitments will remain. This will include any guarantor provisions unless this was to remain as part of the settlement. The Lessor will be left to do as they wish with the property.
Surrenders are usually difficult to negotiate, as Lessors are reluctant to release Lessees from their obligations under their lease.
It is possible to obtain a future dated surrender whereby the Lessor agrees to surrender the lease within a certain timeframe. This scenario usually occurs when the Lessee is attempting to exit, and the Lessor and Lessee are actively looking for a replacement tenant.
Assigning a Commercial Lease
Assigning a lease involves the transfer of obligations from the current Lessee (Assignor) to a new tenant (Assignee). This must be done with the consent of the Lessor. The conditions for assignment of a lease are governed within the lease itself and if the lease comes under the Retail Leases Act, there are assignment provisions that will override the lease, where they are in conflict.
To assign (transfer) a lease, the Assignee must usually satisfy three requirements:
- The new business must have the same or similar permitted use as that under the original lease;
- The Assignee must have a similar financial standing to the assignor;
- The Assignee must have the same level of retail skills or business acumen as the Assignor.
Once a new Assignee meets the three stipulated requirements, with Lessor consent, a deed of consent and assignment will be created. In addition, if the lease comes under the Retail Leases Act, an additional disclosure statement will be required to be prepared and executed.
Issues for Consideration in Assignment
Assignments occur more frequently than surrenders as businesses change hands frequently. However, there are several issues for consideration before entering into an agreement.
Length of Term Left
If a lease has no option and the unexpired term is less than say 2 years, it may not be advisable to assign the lease as there is no certainty of tenure beyond the expiry. In this case it may be better for the Assignee, Assignor and Lessor to agree to a new lease.
When first entering a lease, it is important to consider whether the permitted use definition is so narrow as it will act to prevent assignment. This can especially be an issue where the business name is contained within the definition, restricting any assignment to another trader.
Release of Financial Obligations and Guarantors
It is important that the Assignment Deed fully releases the Assignor and the Guarantors from their obligations under the existing lease. If this is not agreed upon, the Lessor may pursue the Assignor if the Assignee defaults on the lease.
Both surrenders and assignments are complicated legal agreements and professional advice should be sought prior entering into either of these agreements.
This post was authored by Simon Fonteyn. Simon is one of Australia’s leading experts in retail, childcare and medical leasing and rental valuations. He holds a Degree in Accounting & Finance, a Diploma of Valuation, a Masters of Management and is an Associate of the Australian Property Institute. With over 25 years experience in the commercial property industry, Simon founded LeaseInfo® as a way to provide more transparency to the industry.