Commercial lease agreement
Commercial lease agreements have many intricacies. Photo – Canva.
  • A sale of a business with a lease in place can be a very complicated process
  • When a tenant is considering selling their business, they should inform their landlord well in advance
  • Each situation is unique and can be slightly different from another one

One of the most complicated processes commercial property managers have to manage is the leases’ assignment.

1.      What is an ‘Assignment of a Lease’?

An ‘Assignment of a Lease’ is a legal term for transferring a lease to someone else.

This process usually happens when a sole trader sells the business, or the directors of a company sell their shares to a third party of the Lease. When the sale of the activity or shares settles, and the lease does not get transferred across, the previous parties remain responsible for the lease, even though they do not own the company any longer. The lessor usually has the right to approve or decline a request for an assignment. However, the lessor should not unreasonably decline the enquiry.

2.      The parties involved with an Assignment of Lease

The following parties participate in the transfer of a Lease:

•        Lessee: the organisation or individual that rent a property or land from the Lessor who is the official party on the Lease (also referred to as ‘the Assignor’)

•        Lessor: the individual or organisation that leases property or land to the Lessee.

•        Assignee: the (proposed) business planning to take over the lessee’s responsibilities during this process.

•        Purchaser: the party purchasing the business or shares from the Lessee (also known as the proposed assignee).

•        Assignor: the lessee who has requested the transfer of the lease to the assignee

•        Business Broker: a party that assists the assignee and assignor with the process of the assignment of lease

•        Commercial Property Manager: a Party phat manages the assignment process on behalf of the lessor (usually the same party that administers the lease agreement between the lessee and the lessor)

•        Settlement Agent(s): a party that assists with the sale and settlement of the business

•        Auditor (optional): an independent party that helps with auditing the variable outgoings reconciliation applicable to the assignor.

•        Solicitors: the legal practitioner or firm that assists with the preparation of the Deed of Assignment.

3.      The process

When a tenant is considering selling their business or shares to the purchaser, they should inform their landlord or property manager well in advance to start the process.

The first official action would be for the proposed assignee to complete an application form for the lessor’s review and consideration. Depending on the lease, the legal and admin fees associated with the assignment are the lessor, assignor or assignee’s responsibility.

The parties might agree differently by way of a written agreement, documented in the Deed of Assignment and the application form. Once the application form has been completed and signed by all parties to the proposed assignment and the lessor has given its consent to the proposed transfer, the lawyers are instructed to prepare the legal documents.

The Deed of Assignment is a condition of the sale, and settlement cannot occur until all parties have signed and agreed to the deed. Once all the parties have executed this legal document, the property manager will forward the copies to the settlement agent(s) and give them the go-ahead to settle the transaction at their convenience.

The Deed of Assignment will become effective from the date of settlement. This whole process could take up to a minimum of 28 working days, depending on different factors that could delay this process.

4.      What happens after settlement

After settlement, the assignor becomes the previous lessee and is released from all the lease’s responsibilities, and the assignee becomes the lessee. The change should not affect the landlord much, as only the entity responsible under the same terms and conditions as the previous tenant takes over the Lease’s responsibilities with immediate effect. After the property manager has distributed the Deed of Assignment to all the parties involved with the transfer, they might require to reconcile the previous tenant’s outgoings. The assignor is responsible for reimbursing the landlord for the portion of the outgoings (if so under the Lease) up to the date of settlement or otherwise, as agreed by the sale and noted parties down on the settlement statement.

Conclusion:

A sale of a business with a lease in place can be a very complicated process with lots of different parties involved that all have some input to the puzzle that leads to an assignment of lease. If you have a business and have a lease in place, reach out to your property manager or landlord, and inform yourself of what is involved from both a practical and financial perspective. Each situation is unique and can be slightly different from another one.

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Please note, this article is for the general public only and contains general information. Please obtain independent legal advice to understand what you are required to do in your situation.

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