Lease assignment doesn't end tenant's contract

Each week, national law firm Simpson Grierson answers commercial property questions which can be emailed and headed "property problems". This week's question is answered by senior associate Daniel Kelleher and solicitor Lara Christoffersen who can be contacted at daniel.kelleher@simpsongrierson.com and lara.christoffersen@simpsongrierson.com

Q. I run a cafe business which has been quite profitable over recent years and I am going to sell the business to a friend.

We leased the premises, originally for a term of six years, which now has just one year left.

I've been told that as part of the sale of my business the lease will be assigned to the purchaser. I don't know what this means.

My company is the tenant under the lease and I have personally guaranteed it.

I want to move overseas and retire without any business obligations.

Can you tell me what an assignment is and if this means I am no longer liable for the lease and the guarantee? Are there any other options?

A. When selling a business, an assignment of the lease is usual as part of the sale. However, it is important to check your lease itself as it can sometimes contain provisions prohibiting assignment of the lease.

Unfortunately, assigning a lease does not release the tenant, including any guarantors of the tenant, from their liabilities under the lease.

The first step in understanding an assignment of lease is to understand the nature of a lease contract.

An executed lease creates two separate relationships between the landlord and the tenant. One is a relationship based on the lease contract. The other is a relationship based on the occupation of leasehold property.

An assignment of lease is a transfer by the original tenant of his or her rights to use the leased property to a new tenant.

The original tenant transfers their occupation of the leasehold property relationship to the new tenant.

However, an assignment of lease does not transfer or extinguish the contractual relationship the original tenant has with the landlord.

The original tenant is still contracted to the landlord and therefore remains liable under the original lease contract to the date that the lease expires. This liability continues even if there are further assignments - unless the tenant's liability is expressly released by the landlord in the deed of assignment of lease.

This means that if the new tenant breaches any obligations of the lease, including the obligation to pay rent, the landlord can use its rights under the lease to obtain the rent or claim damages from the original tenant or the original tenant's guarantor.

It is important to ensure that the assignment document that you execute contains an indemnity provision where the new tenant indemnifies the original tenant for any breaches of the lease it may make.

This means if the landlord sues the original tenant to rectify any breaches made by the new tenant then the original tenant can in turn sue the new tenant for the payments it has been forced to make to the landlord.

However, if the new tenant goes into liquidation this indemnity could be of little or no value to the original tenant. Your personal guarantee of the original tenant means that you will have the same liabilities as the original tenant (your company) under the lease contract.

An assignment of lease will not constitute a variation of the lease and as such your liability as guarantor will continue.

The landlord can seek to obtain payments for the new tenant's breaches of the lease from you under your guarantee of the lease.

To extinguish your liability as guarantor and the liability of your company as the original tenant, the lease contract must come to an end. For this to occur, you will need to negotiate with the landlord to obtain their approval to surrender the existing lease and for the purchaser to enter into a new lease directly with the landlord.

The landlord may see a benefit in this approach due to the short timeframe you have left on the current lease and the opportunity to grant a new lease with the purchaser for a longer term.

Alternatively, the landlord could agree to release your company's ongoing liability and also you as guarantor in the deed of assignment.

The information contained in Commercial Property is intended to provide general information in summary form current at the time of printing. The contents do not constitute legal advice and should not be relied on as such. Specialist advice should be sought in particular matters.