When can (and can’t) a retail landlord withhold consent to a proposed lease assignment?

Commercial and retail leases typically contain a provision allowing the tenant to transfer (assign) the lease to another tenant. The need or desire to transfer the lease can arise in a number of different circumstances – most usually where the incoming tenant is purchasing from the outgoing tenant the business which operates from those premises, or the outgoing tenant wants to move its business to alternate premises and finds another business to take over the lease. The Supreme Court recently considered a landlord consent issue relating to the Sydney Italian restaurant, Bar Machiavelli (In the matter of Bar Machiavelli Pty Ltd (Administrator Appointed) [2018] NSWSC 1395).

The restaurant

In late 2015, a lease was signed for a new Machiavelli restaurant to open at premises in Rushcutters Bay. To fund the fit-out for the premises, loans were made by related companies to the company operating the restaurant. However, following defaults in repaying the loan, the lenders commenced debt recovery proceedings against the company. The company entered into voluntary administration, suspended its operations, and entered into a licence agreement with another company (Sciue) to operate the restaurant. As part of the administration process, it was proposed (through separate Deeds of Company Arrangement advanced separately by Toppi and Bicher, the lenders) that the lease for the premises be assigned to the respective DOCA proponent. The administrator recommended that the company enter into the DOCA with Toppi, because even though it considered that the Bicher proposal would be more advantageous to creditors, it noted that the landlord had refused to consent to an assignment to Bicher but had indicated that it would be prepared to consent to an assignment to Toppi.

The earlier request for consent

In August 2018, the company administrator sent an email to the landlord’s solicitor formally requesting consent for the transfer of the lease to Bicher. The email attached various documentation in relation to Bicher, its financial background, and its proposal for the future operation of the restaurant (such as a vision statement, marketing plan, staff manual and transitional plan). The landlord’s solicitor subsequently responded, stating that the landlord would not consent to the proposed assignment on the basis that it considered the financial resources and retailing skills inferior to those of the current tenant, and listed a number of factors on which its decision was said to be based.

The claim

The plaintiffs claimed an order that the landlord consent to the assignment by the tenant (Bar Machiavelli) to the new tenant (Bicher) for the Rushcutter Bay premises.

The law

Section 39 of the Retail Leases Act 1994 (NSW) provides the grounds upon which the landlord is entitled to withhold consent to the assignment of a retail shop lease, including:

1. If the proposed tenant proposes to change the use of the premises;
2. If the proposed tenant has “financial resources or retailing skills that are inferior” to the current tenant;
3. If the current tenant has not complied with the procedural requirements set out in section 41 for the request for consent.

The landlord is entitled to withhold consent only if one or more of the circumstances set out in section 39 objectively exists, regardless of whether or not in the landlord’s opinion, reasonable or otherwise, one exists. As stated by the Court:

“The question whether such circumstances exist is ultimately one for determination by the Court, on the evidence before the Court.”

The Court did not accept that it was confined to the material that was presented to the landlord.  It is an objective test, and the burden rests with the claimant to show that none of the circumstances set out in section 39 exist – that is, that the proposed tenant has financial resources and retailing skills that are not inferior to those of the current tenant; and the company has not failed with the section 41 procedural requirements. The Court considered these issues separately.

Does the proposed tenant have financial resources and retailing skills that are not inferior to those of the current tenant?

Financial resources - The comparison is to be made at the time of the proposed assignment, not at the commencement of the lease.  In this instance, the comparison was to be made between the status quo (that is, the company in administration licensing the restaurant to another company) and the proposed assignment.  After considering the proposed tenant’s financial reports, the Court determined that the proposed tenant’s financial resources were not inferior to those of the insolvent current tenant.

Retailing skills – The retailing skills to be considered are those in the retail sector for the purposes for which the premises are used – that is, as a restaurant.  The landlord sought to distinguish the retailing skills of the individual directors for the current tenant and the proposed tenant. This issue was considered in the 2016 NCAT decision of McEvoy Food Company Pty Ltd v Miziner and Finch, where the nominated directors (who had superior skills) were no longer working in the business, the business had not traded for some 6 months, and therefore it was stated: “there are currently no retailing skills being demonstrated by the [current tenant] as there is in fact no retailing.  Consequently, as there are no retailing skills for comparison, any retailing ability by the proposed assignee must be greater than that currently being demonstrated by the applicant.” In considering the current matter, the Court noted that the skills of a director, who is no longer acting, and of former employees, are not skills that the company can presently deploy on its own account in the restaurant.  The Court concluded that the proposed tenant’s skills were therefore “manifestly superior” to those of the current tenant’s.

Section 41 procedural requirements

Section 41 requires the current tenant to provide the landlord with such information as the landlord may reasonably require to be satisfied that the financial resources and retailing skills of the proposed tenant are not inferior to those of the current tenant.  The landlord argued that if the materials presented to the landlord were insufficient to reasonably satisfy the landlord, then the landlord was entitled to withhold consent. The Court did not accept this argument.  It stated that if the landlord asks for further information, and the request is a reasonable one, then the tenant must provide the information so required, and failure to do so will be a non-compliance with section 41, therefore entitling the landlord to withhold consent.  It does not therefore follow that there is a non-compliance merely if the tenant fails to provide sufficient information to satisfy the landlord. The Court further commented that it is for the landlord to specify the information sought, and to do so with “a reasonable degree of specificity”.

The decision

The Court held that the landlord was not entitled to withhold consent, and ordered that the landlord consent to the proposed assignment. The landlord was ordered to pay the proposed tenant’s costs.

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It is imperative that a landlord act reasonably in considering information presented by a proposed tenant when requesting consent, and if necessary, ask for further information about the proposed tenant’s financial resources and retailing skills.