Lease Assignment and Landlord Consent: The Deal-Breaker Most Vendors Underestimate

Why the lease quietly controls your sale

If your business operates from premises you do not own — and most do — your lease is one of the three things every serious buyer will scrutinise (the other two are the financials and the staff). A lease that is short, unassignable, personally guaranteed in a way that won't release you, or sitting just before a rent review can compress your sale price or end the deal entirely.

This article explains how lease assignment works under New Zealand law, what landlords can and can't refuse, and what to do six to twelve months before going to market.

What the law actually says

Most commercial leases in New Zealand are documented on the Auckland District Law Society (ADLS) Deed of Lease, which contains an assignment clause requiring the landlord's prior written consent. That clause is overlaid by section 226 of the Property Law Act 2007.

Section 226 provides that where a lease requires landlord consent to an assignment, that consent must not be unreasonably withheld. The landlord must also respond within a reasonable time and cannot demand a payment for giving consent unless the lease specifically allows it (legal costs aside).

In other words: the landlord is not a bystander, but nor are they a gatekeeper with unlimited power. They are constrained to act reasonably — and the test of reasonableness has decades of case law behind it.

What "reasonable" actually means

Courts have consistently held that a landlord can reasonably refuse consent to an assignment where:

• The proposed assignee is financially weaker than the current tenant.
• The proposed assignee has a track record of default elsewhere.
• The proposed use of the premises is incompatible with the lease or with other tenants in the building.
• The assignee cannot or will not provide acceptable guarantees (personal guarantee, bank guarantee, bond top-up).

A landlord cannot reasonably refuse consent simply because they:

• Don't like the buyer personally.
• Want to renegotiate the rent.
• See an opportunity to recover the premises for their own use.
• Are taking a long time to make up their mind.

Personal guarantees and why they often don't release you

Most NZ commercial leases include a personal guarantee from the directors of the tenant company. When a business is sold, the vendor often assumes the personal guarantee falls away at assignment. It usually doesn't — at least not automatically.

A personal guarantee typically secures the obligations of the tenant under the lease for the full term, including any obligations that arise after an assignment, unless the guarantee or the assignment deed explicitly releases the guarantor.

Translation: if you sell your business, the buyer takes over the lease, and then the buyer defaults on rent three years later, you can still be chased for the money.

What to do about it:

• Insist on a formal release in the deed of assignment, signed by the landlord.
• If the landlord refuses, negotiate a time-limited residual guarantee (six or twelve months) instead of open-ended exposure.
• Make the release a condition of the sale. A buyer who won't help you push for it is a buyer who hasn't understood what they're asking of you.

The rent-review trap

The worst time to sell a business is six weeks before a market rent review. Buyers know rent will move; they just don't know which way. The uncertainty is priced as risk, and the risk premium comes off your sale price.

If a market rent review is within twelve months of when you plan to go to market, get advice on whether to:

• Bring the review forward by agreement with the landlord, so the new rent is known when the IM goes out.
• Defer the campaign until the review is settled.
• Negotiate a rent cap with the landlord as a one-off, in exchange for a longer commitment from a strong incoming tenant.

Term remaining: the buyer's lens

Buyers and their bankers think in terms of certainty of tenure. As a rule of thumb:

• More than 5 years of secure tenure (term + rights of renewal that haven't been exercised yet): strong, no negative impact on price.
• 2 to 5 years: acceptable for most buyers; expect questions.
• Less than 2 years with no renewal: a serious problem; expect a discount or a long, conditional negotiation with the landlord before the deal closes.

If you have rights of renewal that have not yet been exercised, do not exercise them ahead of sale unless your lawyer specifically advises it — the buyer may want to do that themselves to start a fresh clock.

Approach the landlord early

The biggest single mistake vendors make is treating the landlord as the last person to tell. Landlords who hear from you in writing at the start of your campaign, with a clear plan and a commitment to deliver a creditworthy assignee, almost always respond constructively. Landlords who learn about a sale via the buyer's solicitor two weeks before settlement often dig in.

A simple letter, ideally drafted by your lawyer, that:

• Confirms you are exploring a sale.
• Confirms you will only present qualified buyers.
• Asks for the landlord's reasonable cooperation under section 226.
• Asks for an indication of what they would need to see in an assignee.

…costs nothing and changes the dynamic of the entire process.

What this means for you

Three actions, six to twelve months before you go to market:

1. Read your lease with your lawyer, especially the assignment clause, personal guarantee, rent review timing, and term remaining.
2. Open a constructive conversation with your landlord in writing, framed as a heads-up rather than a request.
3. Build the lease story into your IM so buyers see certainty, not a question mark.

General information only — leases vary; talk to your lawyer before sending anything to your landlord.