Lessors beware: Make requests specific and reasonable - assignment of leases

A recent New South Wales Court of Appeal case (Lockrey v Historical Houses Trust of NSW [2012] NSWCA 249), provides important guidance for all parties involved in proposed assignment of retail leases.  In this Bartier Bulletin, we look at the process of seeking a lessor’s approval to an assignment, the lessor’s imposition of conditions to its consent and the Court’s interpretation of what information is specific or reasonable enough which a lessor may require for a lessor to determine the business experience of the proposed assignee, in giving approval to a request for an assignment.

The Retail Leases Act

Section 41 of the Retail Leases Act 1994 (NSW) (Act) is commonly replicated in the express terms of a retail or commercial lease, setting out the mechanism for obtaining the lessor’s consent to the assignment of a lease.  Section 41(a) of the Act states:

“A request for the lessor’s consent to an assignment of the lease must be made in writing and the lessee must provide the lessor with such information as the lessor may reasonably require concerning the financial standing and business experience of the proposed assignee.”

Section 41(b) requires that the lessee must “furnish the proposed assignee with a copy of any disclosure statement given to the lessee in respect of the lease” before requesting the consent of the lessor to a proposed assignment of the lease.

A deemed consent to the assignment will arise under section 41(d) of the Act if sections 41(a) and 41(b) have been complied with and the lessor has not, within 28 days after the request for consent was made, “made its mind up”.

The facts of Lockrey v Historic Houses Trust of New South Wales

The Historic Houses Trust of New South Wales (HHT) entered into a retail lease with Mr Lockrey and Mr Shelhot as joint tenants, and as partners in operating a café business from the leased premises.

Mr Shelhot later sold his partnership interest to Mr Lockrey.  A transfer of lease was signed by Mr Shelhot in favour of Mr Lockrey.  Mr Lockrey sought to obtain HHT’s consent to the assignment of Mr Shelhot’s interest in the lease to him.  The lease contained a clause that largely replicated the requirements of section 41 of the Act.

A trail of correspondence then ensued between HHT and Mr Lockrey for a period of nearly two years during which HHT imposed various conditions on its consent.  Critically, in answer to the initial request for consent to the assignment of the lease made by Mr Lockrey, HHT requested the following information pursuant to section 41(a) of the Act:

• Verifiable information regarding Mr Lockrey’s financial standing;

• A detailed proposal as to how Mr Lockrey proposes to clear his current indebtedness;

• A statement regarding Mr Lockrey’s proposed strategies to avoid future indebtedness.

The consent to the assignment of the lease was never provided by HHT.  Mr Lockrey commenced proceedings in the Supreme Court seeking declarations that HHT had unreasonably withheld its consent to the transfer of the lease and that Mr Lockrey and Mr Shelhot were entitled to transfer the lease to Mr Lockrey.

The Supreme Court decision at first instance

At first instance, in dismissing Mr Lockrey’s claim and finding that HHT did not unreasonably withhold its consent to the assignment, Stevenson J found that:

• HHT had made a request for information concerning Mr Lockrey’s financial standing under section 41(a) of the Act.

• The request for information was reasonable.

• The request was not withdrawn or abandoned by HHT.

• Mr Lockrey never complied with HHT’s request.

• HHT was entitled to withhold its consent by reason of Mr Lockrey’s failure to comply with section 41(a) of the Act. 

The Court of Appeal finding

The Court of Appeal, in setting aside the orders of the Supreme Court, was of the view that HHT’s request for “verifiable information regarding Mr Lockrey’s financial standing” did not qualify as a description of information “concerning” Mr Lockrey’s “financial standing” that was “reasonably” required by HHT pursuant to section 41 of the Act.

The Court of Appeal found that the request lacked the essential quality of specificity to which a lessee was entitled to expect from such a request. 

It was for HHT, the lessor, to specify the information it required.  The letter from HHT did not identify any particular information required.  Rather, the request was for the “…totality of the information in existence concerning Mr Lockrey’s “financial standing”".  It was not for the recipient of the request to identify every conceivable fact concerning Mr Lockrey’s “financial standing” and to make a judgment whether that fact was verifiable, and if it was verifiable, to add it to the collection of facts to be communicated in satisfaction of the requirement. 

On this basis, Mr Lockrey and Mr Shelhot did not become subject to any obligation under the lease or under section 41(a) of the Act to provide information regarding Mr Lockrey’s financial standing.

In relation to section 41(b), it was accepted that no disclosure statement was “furnished” to Mr Lockrey by Mr Lockrey and Mr Shelhot (the joint lessees) before the consent to the assignment of the lease was made to HHT.  The Court of Appeal found that the obligation to “furnish” the disclosure statement was impossible as the disclosure statement was already in the joint possession of Mr Lockrey who was both the joint lessee and proposed assignee.  This condition was held to be inapplicable rather than having not been satisfied.

Accordingly, the Court of Appeal held that the consent to the assignment of the lease was deemed to have been given pursuant to section 41(d) of the Act (and the identical condition of the lease).

Lessons to be learned

The lessons that parties to a lease can learn from this case include:

1. if a lessor is requesting information concerning the financial standing of a proposed assignee pursuant to the terms of a commercial lease or section 41(a) of the Act, it must request specific documents such as financial statements and tax returns for a specified period; and 

2. a lessor must “deal expeditiously” with a request for consent to the assignment of a lease.  This will achieve the purpose of the Act which provides for consent to be deemed to have been given within 28 days of receiving the request for consent if the lessor does not request information about the financial standing of a proposed assignee by that time.

Author - Elias Yamine