THIS QUERY OFTEN RAISES it’s head … whenever the proposed new tenant is felt to have insufficient financial resources.
The 2018 decision of AVC Operations Pty Ltd v Teley Pty Ltd illustrates the circumstances where it was deemed it is unreasonable to withhold assignment of a lease as a landlord, under section 60 of the Retail Leases Act 2003.
The Background
The Applicant (AVC Operations) was the tenant of hotel premises known as the Bush Inn Hotel, located in Toorak, Victoria and owned by the Respondent.
The Applicant wished to assign its interests under the Lease to another company, Wheatland Hotels Toorak Pty Ltd, as a condition precedent to the sale of the Bush Inn business. Wheatland Hotels owned and operated other licensed premises.
The Applicant made several requests for consent from the Respondent landlord that were unsuccessful, and ultimately applied to VCAT for a declaration that consent for the assignment of the leasehold interest to Wheatland Hotels was obtained.
The Decision
VCAT ordered the Respondent was not authorised to withhold consent.
S 60(1) of the Retail Leases Act 2003 provides that landlords can withhold consent if they consider the proposed assignee (in this instance Wheatland Hotels) “does not have sufficient financial resources or business experience to meet the obligations under the lease”.
Whilst the Respondent considered the directors Wheatland Hotels to be experienced publicans with sufficient business experience, they argued they were not reasonably satisfied the company would have the financial resources to meet its obligations under the lease.
VCAT did not accept this to be the case.
Wheatland Hotels was newly incorporated company with no trading history, formed to acquire and run the Bush Inn Hotel.
However, Wheatland Hotels had supplied significant documentation to the Respondent including a business plan demonstrating projected an increase in profits, a substantial security deposit amounting to nine months rent, personal guarantees by each director … along with a corporate guarantee supplied by the company.
VCAT considered these measures to be sufficient on the basis that the Landlord had to act reasonably in applying the financial resources test.
Bottom Line
As landlords of commercial property, investors must be aware that prospective assignees may be able to rely on the financial resources from associated entities (or individuals) to demonstrate they can meet their financial obligations under a lease.
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.
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