commercial lease question

Discussion in 'Commercial Property' started by TMNT, 10th Jun, 2015.

  1. TMNT

    TMNT Member

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    is subleasing a common thing? I thought it was basic 101 commerical lease that one shall not sub lease , just like in resi

    basically, got told a shop owner in a booming area who is on a 7 year lease was offered $100k cash to take over the lease so he basically either sold the lease or reassigned it with a cash incentive, this was year 2 of a 7 yr lease,

    the next assignee was further offered $200k cash at year 3 to reassign/sell/transfer

    I do recall reading a few leases with every lease saying NO to sub leasing only reassigning
     
  2. Scott No Mates

    Scott No Mates ...and people wonder why?

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    An assignment of lease is a totally different beast to subletting.

    The assignment sees the tenant effectively transfer their rights under the lease to a third party. The lessor may impose conditions like requiring the original tenant to guarantee the performance of the assignee for the rest of the lease term (not option terms). This typically occurs with the sale of the original business eg. Cafe operator to new caf? operator ie no change in the approved use.

    A sublease however allows the original operator to stay in place while downsizing/sharing the lease area. The subtenant pays rent to the tenant on the lease. The original tenant is responsible for all of the obligations under the lease. Eg. Caf? operator gets a mate to take over the coffee machine and he keeps running the hot food.

    In the first instance the new tenant is responsible for the lease but the original tenant goes guarantor. There can be payment for the existing business goodwill, stock & fitout. The second is a business agreement between the parties for the use of the space but a tripartite agreement on the sublet.
     
  3. TMNT

    TMNT Member

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    yeah I do know that sublease and reassigning is different,

    however, I do recall a you cannot sublease clause in every commercial lease ive read,

    so was wondering what exactly happened when a original lessee gives up his lease for a big sum to another person, who in turns does the same thing a year later, all within the 7 yr lease

    ive never heard of it and was wondering if it was common or a "cash" arrangement
     
  4. chilliblue

    chilliblue Member

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    It is not a common practice but is does occur.
     
  5. Scott No Mates

    Scott No Mates ...and people wonder why?

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    It is also referred to as key money - a somewhat shady practice outlawed under the retail leases act.
     
  6. TMNT

    TMNT Member

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    ok I See, so does the lease remain under the original person?>

    as far as Im aware, the 3 parties dont know eachother
     
  7. Scott No Mates

    Scott No Mates ...and people wonder why?

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    No - key money is a kickback to the lessor for the assignment of the lease (in lieu of a new lease with adjustment to market rent).

    If the new tenant occupies without assignment then its a breach of the lease and it can be terminated by the lessor who will seek damages for their losses this would involve a claim for the bond & personal guarantees, letting fees, vacancy, lost rent, diminished quality of covenant etc.
     
  8. TMNT

    TMNT Member

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    of course, a breach of lease is a breach of lease

    ahh, just as i thought so its basically a fee/kickback/incentive for the lessor to give up their right. obviously in this case the 2nd lessee thought that since its as booming area, they could make a lot more then the fee while the rent cant be put up other then whats written in the original lease.

    however, wouldnt this be a reassigning of the lease?? I thought that the landlord has to approve the new lessee and if they knew that money was transferrring or if the area was booming, wouldnt they just up the rent or say no?
     
  9. Scott No Mates

    Scott No Mates ...and people wonder why?

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    Key money is prohibited under the NSW retail leases act - RLA NSW

    If the rent is below market, then there is nothing stopping the tenant selling this benefit to the proposed assignee (yes, you can value a lease based on how much below/above market it is). Unfortunately, the Lessor is bound by the lease as to the rent to be charged. For an assignment, it will be the same rent (though they may be able to charge for any costs involved in satisfying themselves that the proposed assignee is a suitable replacement). The lessor remains a signatory on the assignment document (hence tripartite), hence their agreement is evidenced on the new document.
     
  10. Pom

    Pom Member

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    It sounds like they assigned the lease multiple times during a 7 year term which isn't uncommon. The $100 - $200k is likely to be the sale price for the business as a going concern plus equipment, machinery fitout, stock etc. Its not necessarily a premium paid to "buy" the lease, although it could be the case if the rent is significantly below market.
     
  11. Scott No Mates

    Scott No Mates ...and people wonder why?

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    It would not be unreasonable for the Lessor not to agree assign the lease for a second time within the lease term.
     
  12. TMNT

    TMNT Member

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    ok, costs of the business aside, how often do these kick backs occur without the consideration of the business.

    eg have a lease with no business, and someone wants it so bad or if the market has changed, you can basically reassign for a fee?

    ive just never heard of it until yesterday
     
  13. Scott No Mates

    Scott No Mates ...and people wonder why?

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    TMNT, the usage runs with the lease. If the prospect wants to change the use from cafe to pie shop, then they would need to renegotiate the lease to widen/modify the usage clause. The lessor may consider the change of use, for a rent increase.

    The retail leases act only prohibits the lessor/agent from asking key money not the tenant (who may seek a profit rent).
     
  14. tang

    tang Member

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    Though they r two seperate things, The sale of the business should run concurrently with the lessors consent to assign. this is a usual provision but depends on the negotiated agreement.

    Although the lessor is not a party to the sale of the business and therefore is not concerned with the sale price or any premiums involved with the business sale, the lessor can refuse a consent to assignment from the business (assignor) to a prospective purchaser (assignee) on numerous grounds I.e lack of experience, insufficient evidence of funds, financial incapability to sustain a business

    The lessor cannot accept or ask for a "kick back"

    I've seen many tenants sell their business without proper consent. It's not uncommon but it's not in the best interest of the tenant.

    If a tenant sells the business without seeking consent of the owner, there is effectively no assignment and the tenant will it be released from its obligations under the lease.
     
  15. Scott No Mates

    Scott No Mates ...and people wonder why?

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    No lessor consent = no release for the tenant
     
  16. Scott No Mates

    Scott No Mates ...and people wonder why?

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    No lessor consent = no release for the tenant
     
  17. chilliblue

    chilliblue Member

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    Unless there is a court decision that says otherwise. A landlord needs to show clearly just cause as to why they are not issuing consent.
     
  18. Deltaberry

    Deltaberry Member

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    That's a sale of business from what you've described. Very common. Sublease no.
     
  19. tang

    tang Member

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    Correct. The landlord cannot unreasonably withhold consent after the lessee has provided sufficient information for the assignment and info at the lessors request . , for shops governed by her retail lease anyway, otherwise there will be a deemed assignment after 45 (?) days in NSW