Lease liability and selling your business
When you sell your business and assign your lease, you’re not necessarily off the hook for the remaining lease liability. Find out how to ensure your lease doesn’t stay with you when you sell in Australia.
If you decide to sell your business but you’ve still got time left on your lease there are a few hoops you need to jump through to ensure that you’re not liable for anything if it falls through.
There are three people involved in this situation: you (the seller), the buyer, and the landlord.
In Australia, as standard procedure, the landlord needs to approve the buyer and consent to the transfer of the lease to the buyer, using an ‘assignment of lease’. This means that the buyer takes over all of the terms and conditions of the existing lease exactly as they stand including the retinal commitments.
The landlord has to give you this ‘assignment of lease’ as well as a ‘landlord’s disclosure statement’. At this stage, the seller needs to give the buyer both of these documents and a copy of the current lease seven days prior to assigning the lease.
If this process – outlined in the Australian Retail Leases Act 2003 – isn’t followed, the seller is liable for any amounts payable under the lease until the end of the term. So, for example if the buyer has to unexpectedly close the business and is unable to pay the rent, the original lease holder (in this case the seller) has to step in. This liability also extends to any personal guarantor’s under the lease.
Your landlord can say no to the assignment of a lease if the buyer:
- wants to change the use of the premises
- is not suitably experienced
- doesn’t have the equivalent financial capability that you do
If you’re having issues getting landlord consent there are some things you can try:
- The seller agrees to stay working at the business for an agreed period of time until the buyer becomes suitably experienced.
- The buyer provides a bigger-than-usual security deposit to the landlord, so the landlord is comfortable with the financial risk.
- The seller can stay on as a guarantor under the lease (not recommended as they’ll be liable in the case the buyer cannot pay the rent).
At a glance:
- If you’re selling your business, ensure you get landlord consent to assign the lease.
- Use a lawyer to review all the documents and ensure you have complied with all necessary paperwork within the set timeframes.
- Comply with the Australian Retail Leases Act 2003 provisions for assignment to avoid being left attached to the lease after you have sold the business (these requirements might vary from state to state).
As a Timely customer, you can get a free lease agreement consultation (worth $2,500 AUD) with Your Leasing Co, specialists in tenant representation and lease renewals. Simply visit Your Leasing Co to get in touch.
This guide was written with reference to the Australian Retail Leases Act 2003, for different regions, please check local laws.