It’s not you, it’s me.

7 November 2018 | Reading time: 2 minutes

Nobody likes break-ups.

They’re awkward, unpleasant and all too often end up being fairly messy.

While this may sound obvious for romantic relationships, the same rings true in business.

A classic example is the landlord-tenant relationship.

I think we need a break.

When a tenant looks to sell its business a lot of focus and energy is put into finding the right buyer, agreeing on the sale price and locking in the Contract of Sale. However, what is often forgotten about is the lease.

In order to sell a business, it is invariably a requirement for the vendor (as outgoing tenant) to obtain the landlord’s consent to assign the lease from the vendor to the purchaser. But in what circumstances can a landlord hold on to the relationship, and choose not to let go?

Under section 60(1)(b) of the Retail Leases Act 2003 (Vic) (Act), landlords can withhold consent to an assignment of lease if the landlord believes the proposed assignee does not have sufficient financial resources or business experience to meet the tenant’s obligations under the lease.

The clingy landlord.

In the recent VCAT decision of AVC Operations Pty Ltd v Teley Pty Ltd [2018], the landlord withheld its consent to the tenant’s request for an assignment of the lease on the basis that it did not believe the proposed assignee had sufficient financial resources to meet the obligations under the lease. This was despite the directors of the proposed assignee offering to personally guarantee the obligations of the assignee.

VCAT, however, determined that the landlord was not entitled to withhold consent to the proposed assignment of lease.

In coming to its decision VCAT held that the landlord must act reasonably when assessing the financial resources of a proposed assignee and took into consideration the following factors which were relevant in the circumstances:

  • the annual rent payable by the tenant;
  • the amount of time left on the current term of the lease after the proposed assignment date;
  • the proposed assignee’s business plan and projected performance;
  • the nature and extent of any security being asked of the proposed assignee (eg bank guarantee, security deposit, personal guarantees, corporate guarantees etc); and
  • the business experience and track record of the directors of the proposed assignee.

Drawing upon this last factor, VCAT’s decision significantly broadens the interpretation of section 60(1)(b) of the Act and suggests that in assessing a proposed assignee’s ‘financial resources’, landlords must now look ‘behind’ the proposed assignee to take into account the financial backing from related entities and individuals (eg directors).

Where to from here?

This VCAT decision is yet another decision that emphasises the caution landlords should exercise when considering a request for consent to an assignment of a retail lease. While section 60 of the Act may seem to provide landlords with an avenue to refuse consent, the limited way this section has been interpreted over the years suggests that a landlord’s grip on existing tenants isn’t quite as strong as they would like to think.