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What happens to a commercial lease when a property is sold?
When a for sale sign goes up outside your office, you may be considering “what happens to my commercial lease if the property is sold”.
This is an important consideration, given the potential impact on both the tenant and their operations. It all comes back to the requirements under the lease agreement and the Property Law Act.
A commercial lease is a legally binding agreement between the property owner and the tenant that grants the business the right to use the designated space.
The lease must set out the terms and conditions under which the tenant can occupy and operate from the premises, any lease security that should happen at the end of the lease or renewals, any demolition clauses, and what would happen in the event of a sale.
While leasing provides flexibility and the ability to adapt to changing market conditions by increasing or decreasing space requirements, there is always the potential the owner may sell.
Property sale notification requirements
When a property subject to a commercial lease is sold, generally the tenancy will remain in place.
In most cases, the existing lease agreement will transfer to the new property owner under legal protections known as the indefeasibility of title. This means that the tenant's rights and obligations under the lease remain in place, and they will continue to pay rent to the new owner.
This scenario occurs automatically if the lease is registered with the government. Each state and territory has a different requirement, but in Queensland, leases must be registered if the duration term is more than three years.
When the property owner is selling, they are typically required to inform the tenant about the impending sale. This may be a legal requirement.
Depending on the terms of the lease agreement, there may also be required elements in the sale contract that correspond to the lease.
What happens to the tenant when a commercial property is sold
There should be few impacts on a tenancy when a commercial property is sold.
With an effective lease agreement in place, the rights and responsibilities of the outgoing property owners will transfer to the new owners. This includes all the terms and conditions, including incentives and, for the tenant, make good requirements at the end of the lease.
Existing lease security or prepaid rent will be transferred to the new owner, to whom the tenant will now pay rent.
Tenants’ rights and protections if a property is sold
Tenants of commercial properties have specific rights and protections when the property they are leasing is sold. These rights are designed to ensure that tenants are not unfairly disadvantaged by the change in ownership.
Tenants continue to have rights under their lease agreement, which could include a review of the existing terms or the negotiation of a new lease, as well as being able to seek legal advice.
Should the new owner wish to terminate the lease, sufficient notice periods and the correct legal process must be followed.
Lease assignment and novation
Both a lease assignment and novation are methods of transferring the rights and obligations of a lease agreement from one party to another.
However, there are legal differences.
In a lease assignment, the original tenant transfers their interest in the lease to a new tenant. After the assignment, the assignor no longer has any rights or responsibilities under the lease. They generally have to have the approval from the landlord.
Novation, however, means the original tenant is effectively released from the lease, and the new tenant takes over the lease directly - with all the rights and obligations - with the consent of all parties.
Negotiation and new lease terms when a property is sold
If a property is sold, some businesses may take the opportunity to attempt to negotiate new lease terms. There is no obligation to negotiate if the lease term is not close to finishing up.
However, a fresh lease agreement could be beneficial to both parties if there are matters that require attention. It could be that the tenant requests upgrades to the fitout or communal areas, and in return, seeks a market review of the rent or maintenance responsibilities.
Any change in circumstances must be aligned with the prevailing market conditions, and have agreement from the legal authorities of both the tenant and the property owner.
Finalising the sale of commercial property as a landlord
Contractual obligations under the lease agreement require the landlord to provide notice of the sale, notify the tenant, and transfer the lease agreement. All aspects should be covered in the original lease, which will continue to be in effect after the sale.
The new owner becomes the landlord, with all the rights and responsibilities to the tenants that accompany the property transfer.
Lease security must also be moved across to the new owner to ensure the tenant’s financial interests are protected under the new ownership.
The buyer assumes responsibility for the property's maintenance and repairs as outlined in the lease agreement. This includes both routine maintenance and addressing any necessary repairs.
