More About Consent for Lease Assignments

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IN PART1, we considered assignment in the context of where the lease prohibits assignment absolutely or where the tenant cannot assign without the landlord’s consent (to be withheld in its absolute discretion).

This article considers assignment when the landlord cannot unreasonably withhold its consent.

Assignment is allowed … subject to the Landlord’s Consent, which cannot be Unreasonably Withheld

Where s.144 applies, or the lease expressly prohibits a landlord from unreasonably withholding consent. But what does the term “unreasonably” mean.

The following is a summary of the key principles or considerations which have been applied by the Courts when considering restrictions on assignments in leases and the parties’ conduct in the course of acting for landlords, tenants or assignees.

  • The first task is to properly consider the meaning and effect of the lease covenant relating to assignment (i.e. what is required to be satisfied in order for the tenant to assign the lease).
  • The tenant has the onus of establishing that the landlord has unreasonably withheld its consent.
  • In each case, it is an objective question of fact (having regard to all the circumstances) for the Court to determine.
  • The landlord’s reasonableness of refusal is to be considered at the intended assignment date.
  • Generally speaking, but depending on the precise terms of the lease covenant, the grounds of refusal should relate to the character and personality of the proposed assignee and to matters affecting the use or occupation of the leased premises.
  • A landlord is not entitled to withhold its consent to an assignment on grounds which have nothing to do with the relationship of landlord and tenant in regard to the subject matter of the lease.
  • It is not necessary for the landlord to prove that the conclusions which led them to withhold their consent were justified, if they were conclusions which might be reached by a reasonable person in the circumstances.
  • The tenant must provide the landlord with sufficient information for it to make a decision on the application for consent.
  • The landlord is entitled to have a reasonable time to consider the application for consent and may decline to make a decision until the landlord receives what it regards as sufficient information.

Generally, the landlord’s refusal will be deemed reasonable in circumstances where:

  • it is refused to prevent an undesirable person occupying the premises, due to the character and personality of the proposed assignee;
  • the financial position of the assignee is deemed unfavourable. This would include an undischarged bankruptcy, an assignee’s history of bankruptcy or a mere apprehension on the landlord’s behalf regarding the proposed assignee’s financial position;
  • the proposed assignee intends to use the premises for illegal or immoral purposes, or those purposes which have been expressly prohibited under the lease;
  • the landlord predicts “potential discontent” amongst other tenants in the building;
  • the assignment is for a collateral purpose, which goes beyond the mere acquisition of the lease and may cause financial loss to the landlord;
  • the proposed assignor fails to make a well documented application, particularly involving incomplete supporting financial statements;
  • the assignee fails to meet the criteria specified in the lease; and
  • the landlord’s other property interests would be adversely affected by the assignment.

Conversely: The Courts have held that the landlord’s grounds for withholding consent will be unreasonable where they are designed …

1. For a collateral purpose, including:

  • to obtain an increase in rent from the assignee,
  • where the landlord seeks to occupy the premises,
  • where the landlord preferred another tenant or
  • where the landlord refuses as a method of obtaining better lease conditions;

2. To obtain an advantage for the landlord, including:

  • to obtain a surrender of lease that is not a pre-condition of the assignment covenant or
  • to prevent the proposed assignee from giving up other premises which the landlord owns;

3. To force the termination of the lease at the end of the lease period, therefore avoiding the exercise of the option of renewal; and
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4. To force the resolution of a dispute between the landlord and tenant, which has no connection with the assignment of the lease.

Tenant’s Remedies for unreasonable Refusal of Consent

If the landlord’s consent has been unreasonably withheld, a tenant has the following rights:

  • to seek a declaration from the Supreme Court that the tenant can assign without consent or for a declaration that the landlord’s refusal is unreasonable. This will likely result in delays and legal costs which could result in the sale of business agreement being terminated by the purchaser (as assignee);
  • a more expedient and less costly course is to issue a landlord and tenant summons for a declaration that the landlord has unreasonably withheld its consent;
  • to assign the lease without consent (but the assignee is unlikely to agree to this, as there is considerable risk that the tenant may be wrong in their interpretation in which case the landlord would be entitled to terminate the lease for breach and sue the tenant for damages); or
  • to claim damages against the landlord for unreasonably withholding consent. However, generally speaking, Courts are reluctant to order damages against a landlord where the requirement for the landlord’s consent is qualified such that it cannot be unreasonably withheld or refused.

BOTTOM LINE: As a tenant or landlord you have certain rights and responsibilities in regards to your assignment covenant.

Always be aware of the terms of your contract and seek legal advice if you need clarification on your lease agreement.

Disclaimer: If you think a similar situation may apply to you, then you should contact us for detailed legal advice relating to the particular facts and circumstances of your property or lease agreement. This article is not intended to provide such detailed and specific advice and you should not act on the basis of any matter contained in this article without first obtaining more comprehensive professional advice.

Xenos

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