Seller’s Lease Liability on Sale of Business

Getting Rid of a Seller’s Liability to the Lessor After Settlement

Issue – seller’s continued liability to the lessor (of premises) upon sale of the business: A business seller who leases their business premises will not normally be released from their lease upon sale of the business (notwithstanding an assignment of the lease to the buyer). A lessor will keep the seller bound to the lease (under the assignment documents) in case the buyer of the business defaults under the lease after settlement. This usually occurs as a result of mismanagement by the buyer or economic / environment changes. This is a continuing burden on the seller after settlement.

However, under the Retail Shop Leases Act, a lessor is obligated to release a seller (the assignee) upon assignment of a retail shop lease to the buyer (assignee). However, a number of specific and time limited steps must be taken. If the steps are not taken, or not done in the required time or order, the release will not apply.

The steps under the Act are:

1. the assignor (seller) must provide the assignee (buyer) the Assignor Disclosure Statement;
2. the assignee (buyer) must provide the assignor (seller) the Assignee Disclosure Statement;
3. the lessor must provide the assignee with the Lessor Disclosure Statement and a copy of the lease at least seven (7) days before an assignment (i.e. the date of Completion); and
4. the assignee (buyer) must provide the lessor an Assignee Disclosure Statement before the assignment is entered into (again, before the date of Completion).

To complicate things even further, the Act requires that neither party may ask the lessor for their consent to the assignment of the lease until the later of the following:

1. seven (7) days after step 1 above (the assignor (seller) giving the assignee (buyer) the Assignor Disclosure Statement); and
2. upon the occurrence of step 2 (the assignee (buyer) giving the assignor (seller) the Assignee Disclosure Statement).

While the requirements of the relevant provision of the Act are quite tricky, any seller who is concerned about their liability after settlement will want to get it right.

Solution: How does a seller maximise their chance of having this process strictly adhered to in order to obtain a release? Unless the buyer and the seller wish to undertake this process prior to entering into the contract, which is unlikely, a special condition in the contract imposing the necessary steps on the buyer and seller is required. This special condition should be drafted by the seller’s solicitors (and preferably in advance of contract negotiations to limit delay) to suit the circumstances of the seller.

Also, until being in a position to formally ask the lessor for their consent to the assignment of lease in accordance with the Act, the parties (and yourselves) should not hesitate enquiring with the lessor as to their usual requirements for consideration in an assignment but do not request the assignment. This will give the parties extra time to obtain the information and material required (e.g. the buyer’s business references, statement of assets and liabilities and details of business experience).

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers

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