When buying a motel leasehold business, it is very important to put the time into and give proper consideration to seeking the landlord’s consent to assign the lease. Almost every motel lease/motel contract will require the landlord’s consent prior to settlement. This is not a step to be glossed over or assumed. Both the tenant and the landlord will have an ongoing relationship and it is important that the landlord be given adequate time to consider the request.
The legal position for assigning a lease
The first step in considering consent is to review the terms of the lease. Most motel leases will either state that consent cannot be unreasonably refused OR will require consent in certain circumstances. In most leases we see, the landlord must consent if:
- the purchaser is a respectable and financially sound person who is capable of paying the rent and outgoings, performing all other obligations under this Lease and paying for the business;
- the purchaser has a good reputation and business skills which, in the opinion of the Landlord, will enable the purchaser to conduct the business competently;
- any default has been remedied by the selling tenant or waived by the landlord;
- all parties execute a deed of consent (which is usually prepared by the landlord’s solicitor); and
- if the purchaser is a corporation, any guarantee required by the lease or reasonably required by the landlord are provided.
It is up to the selling tenant to ensure that the landlord is satisfied about these matters.
The landlord will have an obligation to act reasonably when considering a request for assignment and, as a general rule, cannot unreasonably withhold their consent.
Whilst we would like to be able to set out with clarity what is reasonable and unreasonable, it is impossible. Every case needs to be considered on its facts. It is clear that the landlord needs to take an active role in reviewing the information provided, verifying it, and must have grounds for any refusal. From the cases, the following are examples of grounds which will usually allow the landlord to refuse consent:
- unsatisfactory references – which went to the character and personality of the assignee;
- an undischarged bankrupt – which resulted in valid concerns regarding the assignees ability to abide by the terms of the lease;
- insufficient information provided about the assignee – which did not show adequate financial information, references, or information about the position of any new guarantors).
Common issues to be aware of when seeking consent
The most common issues we see in seeking the consent of the landlord are delays. Unfortunately the landlord is not usually involved until quite late in the process, and is often asked to consider the matter quickly. Whilst many landlords do their best to accommodate such requests it can sometimes be difficult for them to address the matter as quickly as the tenant and the buyer would like.
Any buyer looking at a motel leasehold business would be well advised to prepare their assignment material well in advance. We suggest that you prepare:
- Resumes detailing qualifications, suitability and experience. This should come from the purchaser ((or if the purchaser is a company the directors of the purchaser). It is important that the resume highlight the purchaser’s previous business experience and in particular evidence that the purchaser has the necessary capabilities to operate a motel;
- At least two business references (from two people who have known the purchaser on a business basis). These references should confirm in writing that the purchaser’s dealings with them have been professional and that the purchaser has the qualities necessary to operate a motel;
- At least two personal references (i.e. someone who knows the purchaser on a social basis should provide a short written letter saying what a fine, outstanding member of the community the purchaser is);
- A statement of assets and liabilities (the landlord is entitled to determine that the purchaser has some financial stability and will be able to continue to pay the rent);
- Details of any borrowings by the purchaser (again the landlord will want to be able to determine that the purchaser will be able to continue to pay the rent). The landlord will also want to understand if there is anyone else (ie. a bank) with an interest in the lease.
Any contract for the sale of the motel leasehold business should be subject to the consent of the landlord to the assignment of the lease (which would allow either party to terminate the contract where the consent is not obtained by the completion date). To allow the parties to meet their timelines, we suggest that the landlord be contacted early in the transaction and the buyer spend some time and adequately prepare their material for the landlord’s consideration.
As mentioned above, the consent is only the first step in what will usually be a long term relationship between the landlord and the tenant moving forward. You don’t want to get off on the wrong foot with your landlord, by rushing the process.
As each lease and business situation will be different, please take our comments as general guidance. Please do not hesitate to contact Mahoneys if you need assistance with your purchase/sale or are a landlord needing assistance in considering a request for consent.