Landlords, can a tenant assign their lease?

20 February 2019

The rights of the landlord and tenant around the assignment of a lease will depend on either the written terms of your lease or the Property Law Act 2007 (“PLA”); If you don’t have a written form of lease, then the tenant has no right to assign the lease (see section 210 of the PLA). If you do have a written lease but there’s no mention of the tenants’ rights around assigning the lease, then the PLA provisions will apply. Most commercial leases are drafted using the Auckland District Law Society (ADLS) Deed of Lease; However, the wording in ADLS leases can be different (depending of the age of the lease, or if amendments have been made to the standard terms) so it’s important to understand exactly what rights you have

The current form of ADLS lease states that the tenant has a right to assign the lease, but must obtain written consent from the Landlord. However, the kicker under this form of lease is that as a Landlord, you cannot unreasonably withhold your consent to the assignment. It’s important to understand on what terms you can withhold consent. As a landlord your consent is subject to the following:

  1. The new tenant being respectable, responsible and has the financial resources to meet the commitments under the lease. In order to meet the test, its standard practice that the proposed new tenant would have to provide you with details of their assets and liabilities, and any previous business experience. If they have no assets and high debt, this may be enough for you to refuse to give your consent to the assignment of the lease.

  2. All rent owing by the current tenant has been paid and they aren’t in breach of the lease. This is a bit of an odd one, as if the current tenant is in arrears of rent then you would probably rather see the back of them sooner rather than later. If the current tenant is in arrears, then this is the ideal opportunity to only give your consent on the basis you get paid any money owing to you.

  3. A deed of covenant is signed and the landlord is provided with a copy. The standard ADLS deed of assignment ties the new tenant to the terms of the lease. The deed of assignment is a key document that the parties enter into, as it records that the current tenant is still liable to you if the proposed new tenant breaches the lease after the assignment has taken place.

  4. If the proposed tenant is a company, then a guarantee from the shareholders of the company should be provided. As a landlord you must remember that even if a company looks good on paper, it can easily be put into receivership or wound up. Without a guarantee from the directors/shareholders, you really have no protection. As discussed in point 1 above, it would also be prudent to get the details of the guarantor’s assets and liabilities. If the shareholders have all their assets tied up in a trust, then the trust should also be the guarantor under the assignment/lease.

  5. The current tenant must pay your reasonable legal costs (regardless of whether your consent is given). Taking legal advice is critical in ensuring that you are well protected and even better when someone else is paying the bill.

Depending on the terms of your lease, the control you have over the proposed new tenant will vary; We recommend you seek specialist legal advice before entering into any documentation which relates to your lease.

Odette Cottle is part of our Corporate & Commercial team at Norris Ward McKinnon.

Corporate & Commercial Team