Myth busting the view that leases need to be assigned when selling a property

It’s a common misconception that selling a property means an existing lease agreement needs to be “assigned”. What is an assignment of a lease and when does this need to occur?

Jack and Jill are owners of a commercial property which they lease to a company that runs a gym. They want to sell the property and believe they need to assign their lease to the purchaser. However, they aren’t really sure what steps they need to take to transfer the lease.

When a property is sold usually the contract of sale for land will specify whether the sale of the property is subject to an existing tenancy.

This means that the purchaser takes on all the obligations of the landlord under the existing lease agreement following settlement of the property.

There is no need for the parties or the purchaser to sign a lease agreement. A new lease agreement will only need to be signed upon expiry of the current lease. A so-called assignment of the lease is not necessary and doesn’t make sense in this situation so, the sale of Jack and Jill’s property will be subject to the existing lease already in place.

What is an assignment and when is it needed?

Jack and Jill own the commercial property but change their mind and decide to hold onto it for the next 5 years instead of selling it. However, the tenant who owns the gym business is looking to sell and move onto another venture. The gym owner has an existing lease in place which doesn’t expire for another 4 years and thinks that the lease needs to be assigned.

An assignment of a lease is where the tenant under the lease ‘assigns’ or transfers their rights under an existing lease to a new tenant. This assignment only applies to the tenant’s rights and not the landlord’s rights.

In the context of a sale of a business an assignment of a lease is usually very common. The vendor of the business will usually lease premises to run their business from. The vendor and tenant under the lease agreement will need to give the purchaser of their business all rights under the lease agreement as a tenant in order for the purchaser to continue operating the business from the premises. (This may be necessary to qualify for the GST exemption also.)

The ability for the purchaser to become the tenant under the lease agreement is usually critical for the smooth running and continuation of the business following a sale.

This means that in order for the purchaser of the gym to continue running it, the current owner of the gym needs to transfer their rights under the lease to the purchaser.

A point to note is that the assignment of a lease cannot usually occur unless the consent of the landlord is obtained. The lease agreement generally sets out terms and whether consent of the landlord is required where a tenant is seeking to assign their rights to someone else.

Despite the assignment of the lease to a new tenant the landlord may still have rights against the original tenant. Enlisting a lawyer to assist with this process is highly recommended. A lawyer will be able to review the existing lease and provide appropriate legal advice on the assignment. Certain documents will need to be drafted for the assignment and some documents will need to be lodged with the local land titles office (generally if the lease is for a term longer than three years and is registered on title).