Edmonds Judd

leases

Assignment of commercial leases re-settlement property inspection

Commercial, Property, Your Own Business
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When your tenant sells their business

A common question that arises for landlords owning commercial premises (or tenants leasing those premises) is what happens to the lease when your tenant sells their business. The answer to this is usually found in the deed of lease itself.

 

Assignment of the lease

When your tenant sells the assets of their business, the lease of their premises will usually be assigned to the purchaser on the settlement date. This is documented by you (as landlord), your tenant (as assignor) and the purchaser (as assignee) entering into a deed of assignment, which will assign the rights and obligations of the lease to the purchaser of their business. Your existing tenant will usually continue to be liable under the lease for the remainder of the current lease term. The assignee will also be liable to meet the lease obligations.

Under The Law Association (previously the ADLS) form of deed of lease, your tenant cannot assign the lease without your prior written consent, which you cannot unreasonably withhold. Your tenant must demonstrate to your (reasonable) satisfaction that the proposed assignee is respectable and has the financial resources to meet the obligations under the lease. Your tenant must also be up to date with rent and not be in breach of the lease. You can also require your tenant and the proposed assignee to sign a deed of assignment, and you may also be able to request a bank guarantee or a personal guarantee from the proposed assignee.

Your reasonable legal fees relating to the assignment of the lease will usually be paid by your tenant.

 

Deemed assignment

If your tenant is a company, the shareholding in that company may change. Existing shareholders may be selling some (or all) of their company shares to a third party, or transferring some (or all) of their company shares to other existing shareholders.

Where shares in your tenant’s company are being sold, you will not need a deed of assignment as the tenant will remain the same. However, if those shareholding changes result in a change in control of the company, which is a deemed assignment under the lease, your tenant is required to obtain your written consent before transferring the shares.

You will have the opportunity to assess the financial resources and experience of the incoming shareholder and propose reasonable conditions to your consent as part of the process. You, the exiting shareholders and the new shareholders will need to negotiate in relation to the release or replacement of any existing guarantees as part of your consent.

 

Agreement to lease

You may not have a deed of lease with your tenant, with the terms of your lease instead documented in an agreement to lease, which is a basic document setting out the broad material terms without going into detail about the day-to-day workings of the lease (which is contained in the deed of lease). A tenant’s rights and obligations under an agreement to lease cannot be assigned, so if your tenant is selling their business and wishes to assign its lease which is documented in an agreement to lease, they will first need to enter into a deed of lease with you, which can be assigned to the purchaser of the business (with your consent).

While agreements to lease can be helpful for the parties to initially agree material terms, they still technically require both parties to enter into a deed of lease reflecting those terms. We recommend that you promptly enter into a deed of lease after signing any agreement to lease so that both parties are aware of their full rights and obligations under all the terms of the lease.

 

We can help

Whether you are a landlord or a tenant negotiating through an assignment of the lease, we recommend early contact with us.

If you are a landlord, we can advise on what information you should request from any proposed assignee to allow you to make an informed decision on whether you consent to the assignment of the lease.

We can help both landlords and tenants in navigating what is and isn’t reasonable from each party in the circumstances.

 

 

 

 

DISCLAIMER: All the information published in Property Speaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Property Speaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650

Leased land impacted by Cyclones Hale and Gabrielle

House, Property, Rural
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Some options for lessees

The damage caused to land by the recent weather events across New Zealand has raised concerns about the ongoing viability of leased land that has been impacted by these storms. Depending on a lessee’s particular circumstances, there are options in terms of relief from rental payments or, in the more extreme circumstances, termination of the lease.

If you are a lessee, the Property Law Act 2007 (PLA) and the law of frustration of leases may provide you with options when the land subject to the lease has been damaged or destroyed. ‘Frustration’ in the legal context means a contract that, subsequent to its formation and without fault of either party, is incapable of being performed.

Property Law Act 2007 implied terms

Section 218 of the PLA implies a list of covenants, conditions and powers in all leases. An ‘implied term’ is what is included in a lease by statute. These terms allow a lessee to seek relief from rent payments or to cancel the lease.

If the land you lease has been destroyed or damaged, the PLA[1] may provide you with rent relief in proportion to the destruction or damage caused. Events that may lead to rent relief include floods and storms. If you are at fault for the event that caused the destruction or damage, such as being responsible for the cause of flooding, you will not be entitled to a rent reduction until the damage is repaired.

If your lease states that the land may be used for one or more specified purposes such as cropping, and during the term of the lease that land can no longer be lawfully used for cropping, you may be able to terminate the lease. An example would be if land was ‘red zoned’ so couldn’t be legally used for cropping any more[2]. As with rent relief, if you are at fault for the land not being able to be lawfully used for the specified purpose, you will not be able to cancel the lease.

Under the terms implied in all leases found in the PLA, you must keep the leased property in the same condition that it was in when the lease term began. However, this does not apply to reasonable wear and tear and events such as floods and storms, unless you are at fault. This means that if the land you lease has been damaged by flood and your lease is due to expire soon, on termination you are under no obligation to restore the land to the condition it was in at the beginning of the lease.

Your lease may include a clause that states any implied terms found in the PLA that are inconsistent with a specific term of the lease will not apply. Before signing a lease, you should review these specific terms to check for any inconsistency with the implied terms set out at schedule 3 of the PLA.

Force majeure

Some leases may include a ‘force majeure’ clause that covers what is colloquially referred to as ‘Acts of God.’ These include events such as floods, earthquakes or, more recently, pandemics. These clauses typically provide for the lease to be terminated, or provide that the parties’ obligations, such as payment of rent, under the lease are to be suspended for a period of time.

‘Frustration’ and rural leases

Recently, leases have been recognised for their contractual nature not just as an interest in land. ‘Frustration’, which is a remedy to cancel contracts, can now be used to cancel a lease.

When there is a radical change in circumstances outside of your control, such as a cyclone damaging the leased land, you may use the remedy of frustration to cancel the lease. Your lease will be cancelled effective from the date of the event. An example of this situation would be if a river changed its course (which did happen in Gabrielle), making it impossible to farm the land, you could claim the lease was ‘frustrated’ so should end from the date the river changed course.

When deciding if a lease could be cancelled via frustration it is important to look at the purpose of the lease and the length of the remaining term. To be successful in using frustration to end a lease, the purpose of the lease will need to be unable to be carried out during the remainder of the lease term. If your lease has a lengthy term remaining, it is less likely it will be frustrated by an event such as a storm that renders the land unusable for a short period of time.

So far in 2023 there have been a handful of severe weather events that have caused significant damage to leased land. As these climate change-related events become more common, we are likely to see frustration being more commonly used to attempt to cancel leases.

 

If you are unsure about the terms of your lease after Hale and/or Gabrielle, or any other the other significant weather events that have recently occurred in New Zealand, please don’t hesitate to contact us. We are here to help.

[1] Property Law Act 2007, s4 of schedule 3.

[2] Ibid, s10 of schedule 3.

DISCLAIMER: All the information published in Rural eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Rural eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650