In a recent Victorian Civil and Administrative Tribunal (VCAT) decision of AVC Operations Pty Ltd v Teley Pty Ltd (2018) VCAT 931 it was held that the landlord of a lease governed by the Retail Leases Act 2003 (Act) was not entitled to withhold its consent to an assignment of a lease of a hotel business on the basis that the proposed assignee did not have sufficient financial resources to meet the lease obligations.
Section 60 of the Act provides in part:
(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 –
(b) the landlord considers that the proposed assignee does not have sufficient financial resources or business experience to meet the obligations under the lease;
In AAMR Hospitality Group Pty Ltd v Goodpar Pty Ltd (2009) VCAT 2782 it was held that a landlord must act reasonably in withholding its consent to an assignment of lease under the Act.
Section 61 of the Act further states in part:
(2) A request for the landlord’s consent to an assignment of the lease must be in writing and the tenant must provide the landlord with such information as the landlord reasonably requires about the financial resources and business experience of the proposed assignee.
The proposed new tenant was a new company formed to purchase and operate the business known as the Bush Inn Hotel and thus had no trading history. The directors of the assignee company were experienced publicans who were also involved in the running of other hotels through different corporate entities. In applying to the landlord for consent, the tenant put forward personal guarantees from the directors of the new company, a guarantee from a company associated with the proposed assignee, together with financial security of an amount equal to nine months’ rent.
The landlord refused consent to the assignment contending the proposed assignee did not have sufficient financial resources to meet its obligations under the lease. The landlord argued that the proposed assignee could not provide any financials of itself, the company guarantee offered from the associated entity was not of value as its directors had no personal assets, and the proposed entity was intending to borrow $500,000 to finance the hotel development.
In making its decision that it was not reasonable for landlord to withhold consent, VCAT considered:
The term of the lease was relatively short – due to expire within 4 years;
The annual rent was $193,000.00 plus GST and the assignee was providing financial security equal to 9 months’ rent;
Personal guarantees were offered by the assignee’s directors (notwithstanding they had no personal assets), and they were experienced in running hotel businesses;
A corporate guarantee from a related corporation which was the vehicle used to run other hotel businesses was offered; and
A business plan was provided to the landlord projecting a 40% increase in takings for the business should the assignment proceed.
VCAT noted that in considering the proposed new tenant’s “financial resources” and “business experience” the landlord should have had regard to the factors above.
A landlord may only refuse consent to an assignment of a lease under the Act if one of the matters in section 60 applies, but in doing so must act reasonably. This decision highlights that in evaluating a prospective assignee, a landlord should look beyond the proposed corporate tenant entity and examine the background of the people in effective control of the proposed assignee.
If you have any queries regarding the operation of leases under the Act including assignments, please contact our Commercial Tenancy Specialists: