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Assistance under law for tenants when business is sold

By Scott Moran, Partner

First published in the The Press, 1 September 2008

Recent changes under the Property Law Act 2007 provide assistance for tenants and purchasers in obtaining the landlord’s consent to an assignment of the lease on the sale of the tenant’s business.

The new provisions under the Act apply to all existing and new leases and apply regardless of differing provisions in the lease itself.  The standard Auckland District Law Society Lease (ADLS) lease has been updated to account for the changes under the Act but parties should be aware that the changes also apply to existing leases on earlier forms of the ADLS lease.

Where a landlord receives a request for an assignment, which often occurs when a business is being sold or is moving premises, the landlord must not unreasonably withhold consent and must, within a reasonable time, either grant the consent or advise the tenant in writing that consent is withheld.

The Act provides some examples of what will constitute unreasonable withholding of consent.  It is unreasonable for the landlord to withhold consent due to the tenant being bankrupt or in receivership or liquidation.  The landlord is unable to require the tenant to make a payment (for example as a premium or fee) as a condition of granting consent,  though this does not effect the standard requirements of the tenant to pay all rental and outgoings up to date and to pay the landlord’s “reasonable” costs for considering the assignment.  Lastly, the landlord cannot impose an unreasonable condition or precondition on the granting of its consent.

If consent is refused, the tenant can now require the landlord to give written reasons for its refusal to grant consent.  This will assist the tenant in establishing whether the landlord had genuine and reasonable grounds for refusing consent and whether the landlord has complied with its obligations under the Act.

If the landlord breaches its obligations under the Act, there is provision for the tenant and, in some cases the purchaser, to obtain compensation from the landlord for any loss suffered.  If the assignment proceeds, then the purchaser has a right to seek compensation under the Act.  But, if the assignment is not completed, then the purchaser has no rights to seek damages against the landlord under the Act.

The result is that the changes under the Act assist tenants and purchasers in that they prevent landlords from unnecessarily delaying giving consent and from taking advantage of any pressure that the tenant might be under to sell their business.

Note however that the landlord is only under an obligation to act reasonably.  Tenants and purchasers still need to ensure that they give the landlord sufficient time to consider the assignment and that the landlord receives all the necessary information to make its decision.  If the tenant only gives the landlord a day or two’s notice before consent is required under the sale agreement, the landlord is unlikely to be considered “unreasonable” if it fails to give consent within that time.

Equally, landlords are still entitled to weigh up whether the purchaser is likely to successfully take over and operate the business.  The purchaser’s previous business experience and financial position will still be important factors in the landlord’s decision.  Tenants and purchasers should ensure that all the information that the landlord will need is available and provided promptly.