Selling a commercial business is more than a simple handover; it's a critical transition that demands careful attention to detail to ensure the new owner can smoothly take the reins. A key part of this process is assigning the existing lease from the seller of the business to the purchaser. Although it may appear straightforward, failing to meet the legal requirements—especially those outlined in the Retail and Commercial Leases Act 1995 (SA) (RCLA)—can leave the seller of the business tied to ongoing lease obligations. This article explores the lease assignment process and the importance of a thorough Assignor’s Disclosure Statement in safeguarding the seller’s interests.
What is an Assignment of Lease?
A lease assignment transfers the rights and obligations of an existing lease from the current tenant (assignor) to a new tenant (assignee). This process is often necessary when a business owner sells their business. When properly executed, the purchaser assumes full responsibility for the lease after a legislated period, effectively stepping into the shoes of the seller of the business.
Assignment procedure
Step 1: Review the Lease Agreement
The lease agreement typically includes a clause outlining the requirements for an assignment. The seller should carefully review the lease to understand if it can be assigned and any relevant conditions or restrictions, including the need for obtaining the landlord’s consent.
Step 2: Provide Disclosure Statements
Before seeking the landlord’s consent, the seller must provide the buyer with both an Assignor’s Disclosure Statement and a Lessor’s Disclosure Statement.
Assignor’s Disclosure Statement
When the lease assignment pertains to an ongoing business, the seller must provide the buyer with an Assignor’s Disclosure Statement to be released from liability after the prescribed period (which is ordinarily two years after the lease has been assigned). As mandated by section 45A of the RCLA and in the form set out in the Retail and Commercial Leases Regulations 2010, this statement must include specific information about the lease, such as:
- Details of the landlord and premises
- Confirmation that the Lessor’s Disclosure Statement has been provided to the assignee
- Current rent and outgoings
- Any outstanding notices or encumbrances
- Information about any concessions or benefits received by the assignor
- Sales figures (if applicable)
- Other relevant information about the shop’s trading performance
The disclosure ensures that the buyer of the business is fully informed about the lease terms and helps protect the seller from ongoing liability after the prescribed period.
Lessor’s Disclosure Statement
In addition to the Assignor’s Disclosure Statement, the seller must also provide the buyer with a copy of the Lessor’s Disclosure Statement initially provided by the landlord. This statement should include any updates or changes since it was first issued by the landlord. If the original document is not available, the seller should request a copy from the landlord.
Step 3: Obtain landlord consent
The seller of the business must formally request the landlord’s consent to assign the lease, but such request should only be made after the seller has provided the buyer with the Assignor’s Disclosure Statement, the Lessor’s Disclosure Statement and details of any relevant changes to such information as described in Step 2 above. This request to the landlord should be made in writing and must include a copy of the Assignor’s Disclosure Statement, as well as any other information the landlord may reasonably require, such as the buyer’s financial and business credentials.
Under the RCLA, landlords cannot unreasonably withhold consent and must respond within 42 days, or consent is deemed to have been granted.
Step 4: Execute Formal Documentation
Once all necessary disclosures are made and the landlord is willing to proceed with the assignment of the lease, the parties may execute a Deed of Assignment. This document officially transfers the lease to the buyer, binding them to the existing lease terms and outlining any remaining obligations of the seller.
Post-Assignment Liability
Assigning a commercial lease does not automatically absolve the seller of the business from all responsibilities. Provided that all procedural requirements under the RCLA are met, including the provision of a valid and accurate Assignor’s Disclosure Statement to the buyer before the request for landlord’s consent is made, the liability of the seller will be limited to the earlier of:
- Two years after the lease assignment date; or
- The lease's expiration date; or
- The day before the commencement of any lease renewal or extension.
However, if the Assignor’s Disclosure Statement is not provided or contains materially false or misleading information or is not provided to the buyer before the seller makes a request for the landlord’s consent, the seller may remain liable for the tenant’s obligations under the lease beyond the relevant date described above even though the lease has been assigned to the purchaser.
How can we help?
If you are considering selling your business or assigning your lease, our team can assist in ensuring compliance with the RCLA. We can help you prepare a valid Assignor’s Disclosure Statement and guide you through the entire assignment process to protect your interests and limit your liability. For further information, you can contact our commercial team, via email at [email protected], or call us on 8414 3400.