Considerations when requesting a retail landlord's consent to assignment of the lease

 If you are a retail tenant, and you wish to sell your business (and assign your lease to the business purchaser), or for any other reason, you wish to assign or transfer your lease to another party, then depending on the terms of your lease, you may need to obtain the prior consent of the landlord.  The lease may also specify that the landlord’s consent cannot be unreasonably withheld.

Under section 39 of the Retail Leases Act 1994 (NSW), a landlord may withhold consent to the proposed transfer for a number of reasons, including if the proposed assignee (that is, the proposed business purchaser) has “financial resources or retailing skills that are inferior to those of the proposed assignor” (that is, you as the seller of the business and the outgoing tenant).

The leading authority in the operation of section 39 in practice is the 2007 Supreme Court decision of Harbourside Catering Pty Ltd v TMG Developments Pty Ltd.

The facts

• Harbourside Catering Pty Ltd (“Harbourside”) was the owner of a restaurant called “The Cove” which operated from premises at Manly Wharf.
• The premises were rented from the landlord, TMG Developments Pty Ltd (“TMG”).
• Contract #1 - Harbourside entered into a contract to sell the restaurant business for $750,000 to Manly Cove Brasserie Pty Ltd (“Manly Cove”), settlement of which was conditional on TMG consenting to the proposed assignment of the existing lease for the premises. TMG refused consent, so Manly Cove terminated the business sale agreement.
• Contract #2 - Harbourside entered into a further contract for the reduced amount of $450,000 to Amancha Pty Ltd (“Amancha”), again with settlement being conditional on TMG consenting to the proposed assignment of the existing lease. TMG again refused consent, so Amancha abandoned the purchase.
• In requesting the consent, Harbourside provided TMG with:
  • ASIC searches of the purchasing entity and shareholders;
  • A statement of assets and liabilities of the purchasing entity and the shareholders;
  • Curricula vitae of the shareholders; and
  • The proposed business plan.
• TMG believed that both Manly Cove and Amancha had skills in operating a restaurant which were inferior to those of Harbourside.
• Harbourside believed that the real reasons for the consent refusal were:
  • Vindictiveness to Harbourside;
  • The desire to choose its own tenant;
  • A desire to settle litigation with Harbourside on terms favourable to TMG.
• TMG denied these allegations.

The issue

Was the landlord entitled to refuse consent to the assignment to each of the prospective tenants?

Was the attempt to extract a settlement of the litigation akin to seeking “key money” (which is prohibited under section 40 of the Act)?

Did it constitute unconscionable conduct in contravention of section 69B(1) of the Act?

The Court’s consideration

Regarding Contract #1 (Manly Cove), the Court noted that:

• neither of the shareholders’ curriculum vitae showed that they had any experience in managing and operating a restaurant business;
• the business plan did not show that any chef or restaurant staff had been engaged;
• in a discussion with the proposed tenant, the landlord had indicated that they were looking for a tenant which was a financially strong ‘first class operator’, with a good understanding of the industry and a good name in the industry, something that they were not convinced that Manly Cove was or had. A tape recording of the discussion noted the landlord stating:

“Now the whole point is that we want a first class operator there. Now we cannot prevent someone who’s a third rate operator buying the lease from them but they’ve got experience and they’ve got finance and they go in and they can do a lousy job, we can’t stop that because that would be consistent with the lease … In this case, we can stop you unless you bring a whole team and show how … how you can manage the restaurant.”

The Court considered what the term “retailing skills”, for the purpose of section 39(1)(b), meant, the Court rejected Manly Cove’s argument that it means skill in retailing “regardless of the area of retailing activity in which the assignee has acquired those skills”.  The section requires a comparison between the retailing skills of the existing lessee and the prospective lessee.  Considering retailing skills generally does not enable a proper comparison to be done.  The Court stated:

“[the retailing skills] must be similar enough to be permit ready comparison of the retailing skills involved.  Whether the similarity is close enough in degree to permit ready comparison for the purposes of the section is a question of fact and impression in each particular case.”

The Court suggested that the prospective lessee needed to demonstrate skills in operating some kind of restaurant, not necessarily seafood, of a similar style and size.

A significant issue for Manly Cove was the inability to particularise the “team” who might be responsible for the continuing operational success of the business.

The Court also was not satisfied that the refusal of consent was made in bad faith and constituted unconscionable conduct.

In relation to contract #2 (Amancha), the Court noted that the prospective lessee’s “retailing skills” were limited to the fact that one of the directors had “ventured into the seafood industry”, but there was nothing to show any experience in being responsible for the overall management and financial success of a restaurant.  The landlord had asked for referees to independently verify the directors’ retailing skills, in relation to which the Court commented:

"There is nothing unreasonable or unconscionable in a lessor not accepting at face value information provided in support of a request for consent to an assignment to a lease; a lessor is entitled to be assured that the information upon which it is requested to make a decision is accurate.”

The Court’s concluding comments related to Harbourside’s claim for damages, noting that when the sales did not proceed, Harbourside continued to operate the restaurant and even so, chose to let the lease expire without exercising any further option to renew.

“Harbourside cannot have the loss of the sale price of the restaurant business as damages unless it can prove that the business, which it kept in its hands, was rendered valueless as a result of the loss of the sales.”

Lessons

If you are seeking a landlord’s consent to an assignment of a retail lease, you are required to provide evidence of the prospective tenant’s financial resources and retailing skills, which could include (but is not limited to) providing:

• a curriculum vitae for each of the persons who will be actively involved in the management and operation of the business to show their “retailing skills”, with a particular focus on experience in being responsible for the overall management and financial success of a business
• a list of assets and liabilities of each director / key person
• a list of referees who are able to independently verify the prospective lessee’s experience
• a proposed business plan