Call 07 834 6000

Tenant Remains Liable to Landlord After Transfer of Lease

30 November 2015

It is a common misconception that if you transfer (or assign) your lease you will have nothing further to do with the lease and will no longer be liable to the landlord. However, you will continue to be liable to the landlord except in some circumstances. Henry learnt this lesson the hard way.

Landlord claims $25,000 from previous tenant

Henry agreed to lease 25 hectares from Alice for cropping. Rent was $50,000 plus GST per annum. Henry and Alice signed a lease for three years. Six months into the lease some land that was suitable for cropping came up for sale. Henry decided to buy that land and Tony agreed to take over the lease.

Unfortunately Tony got into financial difficulties and he couldn’t pay the rent. When the arrears of rent reached $15,000 and the property was in a state of disrepair, Alice had had enough. She managed to find someone else willing to lease the land, but at a reduced rent. Alice went to see her solicitor. Alice’s solicitor ensured that the lease was cancelled following the correct procedure set out in the Property Law Act 2007.  It soon became clear Tony did not have the means to pay the arrears. Alice’s lawyer told her that she could recover the outstanding rent and repair costs from Henry.

Henry went to see his lawyer. His lawyer reviewed the lease document and advised Henry that he would have been liable to Alice to comply with the lease until the end of the three year term if she had not cancelled the lease. As Alice had cancelled the lease, Henry would be liable for the outstanding rent and penalty interest to the date of cancellation, Alice’s legal costs, the costs of making good the land and shortfall in rent until the end of the three year term. Henry was shocked to find the total amount owing was nearly $25,000.

Henry’s lawyer also advised Henry that he would be liable to Alice even if Tony had assigned the lease to someone else. If Alice sold the land, Henry would be liable to the new owner. If the lease had included a rent review clause, Henry would be liable for the increased rent.

Liability of tenant on assignment

The Property Law Act 2007 provides that, on any transfer or assignment of a lease after 1 January 2008, the transferor or assignor of the lease remains liable to the landlord for payment of the rent and performance of all the tenant’s obligations under the lease. If the lease is varied (and the variation was not provided for in the lease at the time of assignment), the previous tenant will not be liable to the extent of the variation. If the lease is surrendered or renewed, the previous tenant will no longer be liable. However, if the lease is extended and that extension is provided for in the lease, then the tenant will remain liable during the extension. If the tenant remains in possession with the landlord’s consent after the expiry date, then the original tenant will remain liable until the lease is terminated. All of this can be changed by the landlord and tenant by providing differently in the lease document.

What can you learn from this?

Leases are complex documents and they are not all the same. The law is not simple. Any agreement to lease (including a variation or assignment of the lease) should be recorded in writing and legal advice taken before any agreement is made. As a tenant you should fully understand the extent of your obligations and potential liability under the lease. If possible you should try and exclude or limit your liability if the lease is assigned – although most landlords won’t agree to this. You should also ensure that the person taking over your lease has the financial resources and ability to meet the tenant’s obligations under the lease.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.