Australia: Consent to Assignment

In the matter of Bar Machiavelli Pty Ltd (Administrator Appointed) [2018] NSWSC 1395

Background

• Bar Machiavelli Pty Ltd (Administrator Appointed) (Tenant) operated a bar and restaurant business under the name Bar Machiavelli from the leased premises.
• In June 2018 the sole director of the Tenant appointed a voluntary administrator to the Tenant.
• Two parties put forward proposals for deeds of company arrangement (DOCA proposals).
• Each DOCA proposal involved an assignment of the lease to the proponent.
• The voluntary administrator considered one DOCA proposal to be more advantageous to the other but was unable to recommend that DOCA proposal to the creditors because the landlord would not consent to assign the lease to that proponent.
• An application was made to the court for an order the landlord consent to the assignment of the lease to the proponent with the more advantageous DOCA proposal (PPB).
• The landlord did not consent to the assignment to PPB on the basis that it considered the financial resources and retailing skills of PPB to be inferior to those of the Tenant.

Retail Leases Act 1994

Notwithstanding that the lease contained a clause that purported to limit the landlord’s right to refuse consent it was agreed between the parties that the lease was a retail shop lease and therefore the provisions of the Retail Leases Act 1994 (Act) prevail.

Section 39 of the Act sets out the grounds on which consent can be withheld.  It states consent can be withheld if the proposed assignee:

1. proposes to change the use to which the shop is put;
2. has financial resources or retailing skills that are inferior to those of the proposed assignor;
3. if the tenant has not complied with the procedure for obtaining consent to assignment (contained in section 41 of the Act).

The circumstances in which a landlord is entitled to withhold consent are not matters which the landlord must be reasonably satisfied but rather as objective facts.

There are other exclusions which are not relevant to this article such as airport retail leases and public tenders.

Procedure for obtaining consent

The procedure for obtaining consent is contained in section 41 of the Act and it provides that:

1. the request for assignment must be in writing by the tenant to the landlord;
2. the tenant must provide the landlord with such information as the landlord may reasonably require to be satisfied that the financial resources and retailing skills of the proposed tenant are not inferior to those of the lessee.
3. The tenant must provide the proposed assignee with an updated landlord’s disclosure statement;
4. The landlord has 28 days to decide whether to consent or refuse content to the assignment;
5. The landlord is taken to have consent to assignment if the lease has complied with section 41 and the landlord has not given notice in writing either consenting or withholding consent to the assignment

What the court found

• The Court accepted that the landlord is entitled to act in its own interests when considering whether the proposed assignee has the appropriate financial resources and retailing skills.
• The Court also acknowledged that in circumstances where the Tenant was a company in administration it was “entirely irrelevant” that the PPB DOCA proposal would produce a better return for creditors.
• The court considered that the comparison of the retailing skills and financial resources should be made at the time of the assignment, not at the commencement of the lease.
• Notwithstanding that PPB’s financial statements were unaudited and imperfect (as is usually the case for a small business) they demonstrated that PPB’s financial resources were not inferior to those of the insolvent proposed assignor, that is the Tenant.
• When determining the retailing skills of a proposed assignee attention should be directed to those skills they presently hold to use in the business. The skills of a director whose powers are suspended by administration are not skills that the Company can use on its own account in the business.  The same can be said of a former employee.
• The Tenant had no obligation to furnish information about the proposed assignee unless required by the landlord to do so. The landlord must specify the information it requires and such information must be reasonably required to assess the assignee’s financial standing or retailing skills.