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Assignment – can the landlord refuse consent based on the assignee’s insufficient financial resources?

AVC Operations Pty Ltd v Teley Pty Ltd [2018] VCAT 931

In this Victorian case, the landlord sought to refuse consent to a assignment of lease based on the proposed assignee’s financial resources. The landlord considered the proposed assignee did not have sufficient financial resources to meet the obligations of the lease. The Tribunal needed to decide whether the landlord was entitled to refuse consent on that basis and whether it was reasonable for the landlord to refuse consent.

Refusing to consent to an assignment based on insufficient financial resources

The Legislation

The Victorian Retail Leases Act includes the following:

Section 60 – When the landlord can withhold consent to an assignment

(1)       A landlord is only entitled to withhold consent to the assignment of a retail premises lease if one or more of the following applies:

(a)       the proposed assignee proposes to use the retail premises in a way that is not permitted under the lease;

(b)       the landlord considers that the proposed assignee does not have sufficient financial resources or business experience to meet the obligations under the lease;

(c)        the proposed assignor has not complied with reasonable assignment provisions of the lease;

(d)       the assignment is in connection with a lease of retail premises that will continue to be used for the carrying on of an ongoing business and the proposed assignor has not provided the proposed assignee with business records for the previous 3 years or such shorter period as the proposed assignor has carried on business at the retail premises.

Even though the words of the Act are clear, the Victorian Tribunal considers that “the words ‘reasonably’ or ‘acting reasonably’ should be read into section 60(1)(b) (AAMR Hospitality Group Pty Ltd v Goodpar Pty Ltd [2009] VCAT 2782), so that the landlord may only refuse consent “if the landlord reasonably considers that the proposed assignee does not have sufficient financial resources or business experience to meet the obligations under the lease”.

The Tribunal’s reasoning is:

“The provisions of the statute are aimed at providing protection to this class of tenant and constraining and restricting a largely unrestricted power which landlords of these premises at common law and before the enactment of special retail tenancies legislation had available. To construe a provision such as Section 60(1)(b) such that one of the protected class of tenants was to be at the mercy of the purely subjective determination of a lessor would not be conducive to the statute’s overall policy”

This Case: The Bush Inn

AVC Operations Pty Ltd v Teley Pty Ltd [2018] VCAT 931

In this short case about the Bush Inn, a pub in Toorak, the lessee requested consent to assign the lease. The landlord had not consented to the assignment because it was not satisfied that the proposed assignee had sufficient financial resources to meet the obligations under the lease.

The proposed assignee offered a 9 month bank guarantee, personal guarantees from the two directors and a company guarantee from another company they owned. The directors of the proposed assignee operated other pubs, including the Orrong Hotel. The entity that owned those pubs was offered as a guarantor to this lease.

The landlord accepted that the directors of the proposed assignee were experience publicans and did not object on the grounds of retail experience. The landlord considered that because the proposed assignee had no trading history, it was entitled to review the financial resources of the proposed corporate guarantor, but it had not been given enough information to satisfy itself that the guarantor had sufficient financial resources to meet the obligations of the lease.

The tenant had provided a number of documents to the landlord about the proposed assignee’s financial resources. The landlord had requested information about the trading history, and statements of assets and liabilities of the proposed assignee. The proposed assignee was newly incorporated for the purpose of purchasing the Bush Inn business, and so had no trading history. They provided some profit and loss statement for some of the other pubs they operated, but not a complete statement of assets and liabilities. The financial statement did not show enough to indicate that the proposed covenantor had a positive net asset balance.

The Tribunal insisted that in applying the financial resources test, the landlord had to act reasonably.

The lease only had three and a half years left. The proposed assignee was offering a bank guarantee equivalent to 9 months’ rent. The Tribunal considered that the projected revenue as anticipated from the business plan should give the lessor some comfort. The Tribunal also considered that it was wrong to question the value of personal guarantees on the basis of a lack of information about the financial resources of those people. The guarantors can be sued personally and have a judgement entered against them. The Tribunal stated that it was “reasonable to assume that business people … would take considerable steps to avoid such an outcome”. The Tribunal adopted the same reasoning in relation to the corporate guarantee offered by the proposed assignee.

The Tribunal “was unable to find that that it was open for the Landlord to reasonably consider that [the proposed assignee] did not have sufficient financial resources to meet the obligations under the Lease”. In other words: it was not reasonable for the landlord to refuse consent to the assignment based on the lack of information about the financial resources of the proposed assignee, in circumstances where there was only a short time left in the lease, a large bank guarantee was being provided as well as personal and corporate guarantees.

There was a large difference between what the Tribunal thought was reasonable financial resources, and what the landlord expected. The short time left on the lease seemed to influence the Tribunal towards favouring the proposed assignee. The landlord may have been looking further ahead.

Matthew Rafferty, Partner

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