Tenants and their guarantors remain liable for the obligations of a lessee under the lease even after they have assigned the lease to someone else.

This means that if an assignee starts defaulting on their rent payments or the landlord terminates the lease for breach, the landlord can make a claim against the original lessee and their guarantors for that unpaid rent or for damages the landlord suffered in connection with the termination of the lease.

Commonly, a tenant will sell their business and assign the tenant’s lease of the premises to the buyer as part of that sale, or the tenant may simply find someone else to take their place in the premises and assign their lease to them. However, the tenant’s and the guarantor’s obligations do not end there, even if the landlord has consented to the assignment and the tenant has provided a replacement bank guarantee or security bonds. In an assignment the original tenant and its guarantors remain liable for the performance of all the obligations of the tenant for the entire term of the lease. If the assignee fails in any way, the landlord can still hold the original tenant, and its guarantors liable to meet those lease obligations. This can be especially daunting in long term leases, as such liabilities can arise many years after a lease is assigned and, worse still, will apply if an initial assignee of the lease assigns the lease to a subsequent assignee. This could even occur without your knowledge as neither the landlord or the assignee must consult with or advise the initial assignee in connection with any further assignment. This means, an original tenant and guarantor have no control at all over who is the current tenant in occupation, but nevertheless remains liable for their acts, defaults and omissions.

Outgoing lessees and their guarantors will only be released from these obligations if the lessor or landlord has expressly agreed to this in writing or a release is required by legislation.

Thankfully, the Retail Leases Act 1994 (NSW), provides that outgoing (assigning) tenants and their guarantors are released from their monetary obligations under a ‘retail shop lease’ to an incoming (assignee) tenant, if they take certain steps required by the Act such as making the required disclosures to the assignee.

Unfortunately, the same protection is not available to non-retail tenants and guarantors. As releases that are sought will need to be negotiated with the landlord as part of the assignment of the lease. If the landlord will not agree to this then the assignor and their guarantor will remain at risk of being required to perform the lease obligations if the replacement tenant fails to do so or is no longer able to do so.

Generally, an original tenant, and their guarantor’s liability, will end at the end of the current term of the lease, that is, it will not apply to any option periods.

If a landlord makes a claim against an original tenant or their guarantors, it is important to seek all required information in relation to that claim, including details of any relief provided to the current tenant. This is relevant as a landlord cannot pursue the original tenant and guarantor for matters that it has released the current tenant from.

Furthermore, if the landlord does make a claim against an original tenant or their guarantor for the default of the current tenant, the original outgoing tenant and their guarantor will usually have a right of indemnity for the claim from the current tenant. Although, the reason a landlord makes a claim against the original tenant or their guarantor in our experience is that the current tenant is insolvent, making this right of little value.

This article is for general information only and not legal advice. Legal advice should be obtained before taking any action or otherwise rely upon the content of this article in any way.

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