Refusing Consent to Assign a Retail Premises Lease

3 September 2018
Alexandra Walker, Partner, Melbourne

The recent VCAT decision of AVC Operations Pty Ltd v Teley Pty Ltd [2018] VCAT 931 (AVC Operations) serves to remind us of the limited power of landlords to refuse consent to a request to assign a retail premises lease.

When can a landlord refuse consent?

Section 60 of the Retail Leases Act 2003 (Vic) (Act) limits the circumstances in which a landlord can refuse its consent to a request to assign a retail lease.

The section is clear. A landlord is only entitled to withhold consent to the assignment of a retail premises lease if one or more of the following applies:

    1. the proposed assignee proposes to use the retail premises in a way that is not permitted under the lease;
    2. the landlord considers that the proposed assignee does not have sufficient financial resources or business experience to meet the obligations under the lease;
    3. the tenant has not complied with reasonable assignment provisions of the lease; or
    4. where 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, where the tenant has not provided the proposed assignee with business records for the previous 3 years (or such shorter period as the tenant has carried on business at the retail premises).

However in 2009, VCAT held in AAMR Hospitality Group Pty Ltd v Goodpar Pty Ltd [2009] VCAT 2782 (AAMR Hospitality) that Section 60 of Act should be construed as if it included the word “reasonable”.

The then Deputy President Macnamara reasoned that the overriding policy evident in the Act is to protect small retail tenancies that do not have the “clout” that larger, or listed corporations may have. He concluded that to construe section 60 such that the protected class of tenant was to be “at the mercy of the purely subjective determination of a lessor” contradicted the Act’s overall policy. It must therefore be read to include “reasonably”, he said.

AVC Operations: The Facts

In AVC Operations, AVC Operations Pty Ltd (Tenant) entered into an asset sale agreement with Wheatland Hotels Toorak Pty Ltd (Assignee) for the sale of the “Bush Inn” business operated from a premises on Malvern Road, Toorak.

The Tenant sought the consent of Teley Pty Ltd (Landlord) to assign the lease for the business to the Assignee but the Landlord refused on the basis that it did not believe the Assignee had sufficient financial resources to meet the obligations under the lease.

Although the Assignee entity was newly established to operate the Bush Inn and had no trading experience, its directors were experienced publicans and were directors of Wheatland Hotels Pty Ltd which company operated other successful hotels. The Landlord did not take issue with the business experience of the Assignee, the question of adequate financial resources was the only point of contention between the parties.

VCAT cited AAMR Hospitality and insisted that the Landlord must act reasonably when assessing the financial resources of the Assignee. In reaching its determination, VCAT  considered:

  • the current term of the lease was due to expire relatively soon, approximately 42 months after the proposed assignment date;
  • the current annual rent of approximately $192,800 plus GST;
  • the Assignee was to provide security equal to 9 months’ rent plus GST;
  • personal guarantees from the directors of the Assignee were offered (though the personal assets of those directors were limited);
  • a corporate guarantee from Wheatland Hotels Pty Ltd was offered (the company had nominal paid up capital and unsecured loans exceeding its net equity); and
  • the Assignee’s business plan for the Bush Inn projected a 40% increase in takings but required $500,000 to effect improvements proposed in the plan.

AVC Operations: The Decision

VCAT concluded that the Landlord was not entitled to withhold consent to the assignment of lease and found that “financial resources” may also comprise financial backing from associated entities or individuals.

In reaching its conclusion, VCAT gave weight to the projected revenue set out in the Assignee’s business plan. It confirmed the plan was not unrealistic and was supported by the favourable performance of Wheatland Hotels Pty Ltd, finding the performance was indicative of the business acumen of the individuals managing that enterprise.

VCAT also valued the offer of personal guarantees from the directors of the Assignee despite having no significant assets. Senior Member Riegler stating that “[he did not] consider that one can overlook the personal guarantees offered by the directors of [the Assignee], merely because those persons have no personal assets. Those guarantors potentially stand to have judgment entered against them should [the Assignee] fail to meet its obligations under the lease. It is reasonable to assume that business people, especially publicans in control of licensed premises, would take considerable steps to avoid such an outcome.”

Senior Member Riegler concluded that the offer of a corporate guarantee Wheatland Hotels Pty Ltd had value for similar reasons.

In Conclusion

A landlord may only refuse consent to the assignment of a retail premises lease on the basis of the matters set out in section 60 of the Act. Its reasons for refusing consent must be reasonably held.

Whether a decision to refuse consent is reasonable will be assessed on a case by case basis.  AVC Operations highlights the broad scope of matters which may be relevant to this decision, including the business acumen and financial resources of associated entities or individuals backing a proposed assignee.

AVC Operations continues a long line of authorities regarding a landlord’s ability to withhold consent to an assignment of a retail premises lease. Unless the circumstances are extreme or a change to the permitted use is proposed, landlords should consider granting their consent but must ensure that adequate security is in place, noting that tenants can be released from ongoing liability with relative ease under section 62 of the Act.

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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