Each week, national law firm Simpson Grierson answers commercial property questions which can be emailed and headed "property problems". This week's question is answered by senior associate Daniel Kelleher who can be contacted at: daniel.kelleher@simpsongrierson.com
Q. The tenant of a large commercial property which I own has recently got into financial difficulty and is currently several months in arrears. Liquidators have been appointed to the tenant's business and have paid the current month's rent but not the arrears. I have now received a request from the liquidators to consent to an assignment of the lease as they have found a purchaser for the tenant's business.
Despite several requests from me about the arrears, they have now suggested that they are not responsible and I cannot insist on being paid the arrears as a condition of consenting to the assignment of the lease. Can you clarify whether I am able to require payment of the arrears?
A. As you are probably aware, in 2007 the new Property Law Act was passed. One of the new inclusions was a code that deals with situations when a tenant under a lease requests the landlord to consent to various matters. This includes a request to assign the lease.
In your situation the most relevant part of that code is section 227(1)(a)(i).
That section provides that a landlord unreasonably withholds consent to a request to assign a lease if the landlord asks for the "payment of an amount whether by way of additional rent or by way of a premium or fine".
It has been suggested by requiring payment of the outstanding arrears of rent, landlords would be acting unreasonably. This is because the outstanding arrears are an "amount" that would be caught by the wording of the section.
In a recent case on this issue, the High Court held that in the context of that statutory provision, an "amount" would "only be improper when it is triggered solely by a request by the lessee for consent to an assignment".
An example of an improper amount would be a landlord requiring the tenant to pay a lump sum equivalent to six months' rent to obtain the landlord's consent to a proposed assignment. The landlord would normally have no right to require a lump sum payment equivalent to six months' rent.
However, the court considered the provision would not apply in circumstances where the landlord sought to enforce a contractual right that exists even if the tenant did not seek the landlord's consent to assign the lease. The landlord had the right under the lease to require payment of outstanding arrears of rent and outgoings even if the lease was not being assigned.
Although this decision seems logical it has clarified the application of this part of the new Property Law Act 2007.
The lease may also be helpful here. In the Auckland District Law Society form of lease for instance, the assignment clause allows a landlord to withhold their consent to assign the lease if the tenant is in arrears in rent and outgoings or otherwise in breach of the lease. You should check your lease to see that it contains similar wording.
On the basis of the recent case, we think it is likely that you would be acting reasonably if you withheld your consent to the proposed assignment of the lease until the outstanding arrears of rent and outgoings have been paid by the liquidators.
A further argument that has been raised is whether a landlord's requirement that the tenant paid the landlord's legal or other expenses in considering the tenant's request for consent to a proposed assignment would be in breach of the same section. Section 227(2) of the Property Law Act 2007 provides that section 227(1) does not "prevent the lessor from requiring the lessee, if the lease so provides, to pay the reasonable legal or other expenses of the lessor in giving consent".
The court held that as long as the lease provides for the tenant to pay the landlord's legal and other costs and those expenses are reasonable, then a landlord may require the tenant to pay the costs as a condition of the landlord's consent.
As with all lease questions, it is important to check the wording of your lease but hopefully we have given you some guidance on how the assignment process works.
The information contained in Commercial Property is intended to provide general information in summary form current at the time of printing. The contents do not constitute legal advice and should not be relied on as such. Specialist advice should be sought in particular matters.
