The recent case of Staythenight Pty Ltd v C & F Rao (the Staythenight case) has reinforced that landlords need to act reasonably and fairly when considering a tenant’s request to assign their lease to a third party. These requests most commonly arise in the context of business sales where the sale contract is subject to and conditional upon the landlord consenting to the assignment of the existing lease in favour of the business buyer.
In such a sale the seller is usually obliged to seek the consent of the landlord to the lease assignment and to meet the landlord’s reasonable costs (including legal costs) of doing so. The buyer assists in this process by providing evidence (usually by way of a statement of assets and liabilities and a history of their business experience) to support the contention that the buyer is financially secure and has the ability to carry out the tenant’s obligations under the lease (including but not limited to paying the rent and other charges due under the lease).
In considering the seller’s request to assign the lease it is usual and reasonable for the landlord to impose conditions consistent with the terms of the lease such as requiring evidence of currency of insurance from the buyer, the provision of replacement security and the provision of replacement personal guarantees (where the incoming tenant is a company). What the landlord cannot do is use the consent request to look to fundamentally vary key terms of the lease for their own advantage.
That was the scenario in the Staythenight case where, amongst other things, the landlord sought to impose an almost 25% rental increase on the buyer as one of the conditions of granting its consent to the assignment of the lease. Not surprisingly the buyer would not accept the landlord’s rental increase requirement and this led to the business sale contract being terminated. The disappointed seller commenced proceedings in the Queensland Civil and Administrative Tribunal (QCAT) seeking, amongst other things, an order that the landlord had wrongly failed to consent to the assignment of the lease in breach of the lease and in breach of the provisions of the Retail Shop Leases Act. The members of QCAT duly made such an order and the seller received a significant award of damages by way of compensation.
The case serves as a useful reminder to landlords, particularly those who lease premises governed by the provisions of the Retail Shop Leases Act, that they must act reasonably and rationally when considering a request by a tenant to assign the lease. The request to assign does not signal an opportunity for the landlord to fundamentally alter the terms of the lease.