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• Assignments of lease - what you should know as a t…

Assignments of lease ? What you should know as a tenant

You (or your company) are a tenant of commercial or retail premises.  You are thinking of assigning your lease. 

What are the main issues?

If you assign your lease, you transfer your rights under the lease to a new tenant.  You cannot assign part of your lease.  An assignment must deal with the whole of your premises.

A proposed assignment requires the consent of your landlord.  Normally, the landlord cannot unreasonably withhold consent to an assignment, provided that the proposed new tenant is of sound financial standing and is willing to provide personal guarantees and/or a bank guarantee at least equivalent to any guarantees that you may have provided to your landlord.

With an assignment, the landlord will normally require you and the new tenant to enter into a deed with the landlord under which the new tenant agrees to take over your obligations under the lease, and you acknowledge that despite the assignment, you are not released from obligations under the lease.

Normally, if you assign a lease, the new tenant takes over your obligations under the lease from the date of the assignment, but you are not released from your obligations under the lease unless you are able to persuade your landlord to release you.  Although releases are not normally provided, there is no reason why you should not request a release.

Although you remain liable after an assignment, landlords will normally release any personal guarantees or bank guarantees that may have been provided by you, provided that the new tenant offers equivalent replacement guarantees.

Transfer of shares instead of assignment

If your company is the tenant under your lease, there may be circumstances in which it suits you to sell the company rather than assign the lease.  Some leases contain provisions which require the landlord’s consent for a transfer of all or a majority of shares in the tenant company, as if the transfer was an assignment of the lease.  If your lease does not contain these provisions, the consent of the landlord will not be required.  However, if personal guarantees have been provided, the landlord’s consent will be required if it is intended to replace those guarantees.

Retail Lease Act

If your lease is of retail premises covered by the Retail Leases Act , that Act sets out the procedure to be followed in relation to assignments and limits the circumstances in which your landlord can withhold consent to an assignment.

Legal Expenses

With an assignment, the landlord will expect its legal expenses in connection with the assignment to be reimbursed.  You may be able to negotiate for the subtenant to pay all or some of the landlord’s legal expenses and your legal expenses.

Author: Jack Gordon

Contributing Author: Melissa Potter

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Assignment of lease

An assignment of lease occurs when a tenant wishes to transfer a commercial lease to another party before the end of the lease term., information about lease assignments.

This is usually because the tenant is selling their business, or the tenant wishes to exit the lease and has found another party who will take on the already existing lease instead of entering into a new lease with the landlord.

Before a lease can be assigned, the existing lease document must be examined to identify if the lease is able to be assigned and the conditions under which the landlord will give their consent for the assignment to take place. Commercial leases often include a clause stating that the landlord cannot ‘unreasonably withhold’ consent for the assignment to occur. After this examination has occurred, the assignee (the new tenant) will contact the landlord and provide their financial information.

Generally, a commercial lease will contain a provision relating to the notice required to be given to the landlord when assigning the lease. If this notice is not given, or the existing tenant does not seek the consent of the landlord, the existing tenant may be in breach of their lease and it may be terminated.

When selling a business, an assignment of lease can be beneficial as it allows for continuity of the business premises and reduces fit-out costs. In addition, the business will stay recognisable to customers even if the management has changed.

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ASSIGNMENT OF LEASE NSW

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Assignemnt of lease.

An assignment or transfer of lease is used to transfer the lessee’s interest in the property to a new lessee. This often arises in the context of a sale of business where the vendor seeks to assign the lease to the purchaser.

This precedent comes with commentary which explains the role of the lessee, the new lessee (assignee) and the lessor. It also explains the special provisions which apply under the Retail Leases Act 1994.

An assignor’s Disclosure statement is included for leases that come under the Retail Leases Act 1994, and the commentary explains how to use it and the benefits to be derived from using it. The commentary contains links to relevant legislation.

ASSIGNMENT OF LEASE

An assignment of lease is a legal document that transfers the rights and obligations of an existing lease from the current tenant (assignor) to a new tenant (assignee). This process allows the current tenant to exit the lease early, while the new tenant takes over the lease terms for the remaining duration.

Key Components

• Parties Involved : Identification of the assignor (current tenant), assignee (new tenant), and the landlord.
• Lease Agreement : Reference to the original lease agreement, including the date and terms of the lease.
• Assignment Terms : Detailed terms of the assignment, including the effective date of the transfer.
• Consent of Landlord : Typically, the landlord’s written consent is required for the assignment to be valid.
• Obligations and Rights : Transfer of all rights, responsibilities, and obligations under the original lease from the assignor to the assignee.
• Indemnification : The assignor may be required to indemnify the landlord and the assignee for any breaches of the lease that occurred before the assignment.
• Release of Liability : The landlord may release the assignor from liability for future lease obligations, though this is not always the case.

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Novation of Lease vs. Assignment: Legal Distinctions and Implications

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When dealing with lease agreements, understanding the differences between novation and assignment is crucial for landlords, tenants, and legal professionals. Both mechanisms involve transferring lease rights and obligations, but they differ significantly in their legal implications and processes. This blog will delve into the distinctions between novation and assignment and explore their respective impacts on all parties involved.

Novation of Lease

Definition: Novation refers to the process of replacing an existing lease agreement with a new one, where the original parties to the lease are discharged from their obligations, and a new party assumes these obligations. Essentially, novation creates a new contract, and the original contract ceases to exist.

Key Characteristics:

• All parties involved (original tenant, new tenant, and landlord) must consent to the novation.
• The original tenant is completely released from the lease obligations. The new tenant steps into the shoes of the original tenant and assumes all rights and responsibilities under the lease.
• Novation results in a new lease agreement between the landlord and the new tenant. The terms may remain the same or be modified, but legally, it is a fresh contract.
• The original tenant no longer has any legal obligations or rights under the lease. The landlord cannot pursue the original tenant for any breaches or defaults that occur after the novation.

Assignment of Lease

Definition: Assignment involves transferring the rights and obligations of an existing lease from the original tenant (assignor) to a new tenant (assignee). However, unlike novation, assignment does not create a new contract; the original lease remains in effect.

• The landlord’s consent is typically required for the assignment to be valid. The lease agreement usually stipulates whether the landlord’s consent can be withheld.
• The original tenant remains liable for the lease obligations, even after the assignment. This means that if the new tenant defaults, the landlord can still pursue the original tenant for any unpaid rent or damages.
• The new tenant assumes the rights and obligations under the lease. However, the landlord retains the right to hold the original tenant accountable for any breaches by the new tenant.
• Assignment does not relieve the original tenant from liability. This can be a significant consideration for the original tenant, as they may be responsible for the new tenant’s defaults.

Comparative Analysis

Consent and Control:

• Novation: Requires consent from all parties and results in a new contract, providing a clear break from the original agreement.
• Assignment: Generally requires the landlord’s consent but retains the original lease, keeping the original tenant liable.
• Novation: The original tenant is fully discharged from liability.
• Assignment: The original tenant remains liable, posing a potential risk if the new tenant defaults.

Contractual Changes:

• Novation: Creates a new contract, allowing for potential changes in terms.
• Assignment: Transfers the existing contract without altering its terms.

Practical Implications

For Landlords:

• Novation: Offers a clean slate with a new tenant but requires careful negotiation and consent from all parties.
• Assignment: Provides continuity of the lease but maintains the original tenant’s liability, offering an additional layer of security.

For Tenants:

• Novation: Ideal for tenants seeking to fully exit a lease without future liability.
• Assignment: Suitable for tenants who want to transfer their lease rights but are willing to retain liability.

For New Tenants:

• Novation: Ensures they are only bound by the new contract terms.
• Assignment: Requires them to adhere to the original lease terms, with the knowledge that the original tenant remains liable.

Understanding the differences between novation and assignment is essential for making informed decisions in lease transactions. Novation offers a complete transfer of rights and obligations with a new contract, while assignment allows for the transfer under the existing lease, with the original tenant remaining liable. Both mechanisms have their merits and drawbacks, depending on the specific circumstances and objectives of the parties involved. Legal advice is always recommended to navigate these processes effectively and ensure all parties’ interests are adequately protected.

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Assignment of lease – what landlords need to know

When a tenant approaches you to assign their lease, your first port of call should be the terms and conditions contained in the lease itself.  The lease should set out how an application is to be made for consent and conditions to be satisfied – including additional requirements such as further security or guarantees.  The lease will usually set out whether the assigning party and their guarantors (if any) are to be released upon assignment.

If the lease is governed by the Retail Leases Act 1994 (for New South Wales) (“the Act”), the landlord and the tenant need to review the key sections of the Act dealing with assignments as follows:

1. Section 39, which sets out the reasons for a landlord withholding consent if:

• the incoming tenant proposes to change the permitted use;
• the incoming tenant has inferior resources to the current tenant; and
• the consent procedure set out under clause 41 of the Act has not been complied with.

2. Section 41, which sets out the procedure for obtaining consent to the assignment in the following manner:

• consent must be asked for in writing;
• the assignor (current tenant) or the assignee must provide the lessor with financial information and business experience of the assignee;
• the assignor must give a copy of the disclosure statement to the assignee, together with details of any changes that may be relevant; and
• if the lessor has not notified the assignor as to whether they are consenting or not within the prescribed time, then the lease is deemed to be assigned.

3. Section 41A, which releases assignors and guarantors on assignment, provided that the assignor has given the assignee and the landlord a copy of an assignor’s disclosure statement within the prescribed time.

In my experience, landlords will consider 1(b) and 2(b) by asking for financial statements (that show assets and liabilities, and profit and loss where relevant), bank statements, references and even Police checks.  The landlord should consider this information carefully and should seek the advice of an expert in understanding or interpreting this financial information.

Having obtained, in principle, consent to an assignment of lease, the landlord will usually make final consent conditional upon the parties signing a Deed of Consent to Assignment of Lease and registrable Transfer of Lease.  There may need to be a Variation of Lease also signed (if the parties agree on changes to the lease or if the assignment requires alterations such as deletion of outgoing guarantors). 

If a tenant approaches you seeking to assign the lease, it is essential to obtain legal advice to ensure the process is smooth and efficient.

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Commercial Leases in NSW: Common Questions & Answers

Commercial Leases in NSW: Common Questions & Answers

1. what is a commercial lease.

A commercial lease refers to the lease of commercial property. This includes office space, industrial units, workshops and warehouses, retail shops (whether they are within a shopping centre or not), storage sheds, working yards and other non-residential property.

2. How long can a commercial lease term be?

Generally there is no restriction on the term of a Lease, but it must be fixed with certainty.

3. Is stamp duty payable on the creation or assignment of a lease?

Since 1 January 2008, stamp duty has not been payable on a Commercial Lease executed on or after that date. However, it is still payable on the transfer or assignment of a Lease.

4. Must the landlord allow a tenant to renew a lease?

If the Lease contains an option to Lease for a further term, the landlord will be bound by that option.

5. Is the landlord allowed to charge any amount for rent?

Essentially “yes”. No restrictions apply to the amount of rent that can be charged for commercial and industrial premises. However, during the term of the Lease, rent can only be increased in accordance with the rent review provisions in the Lease. Retail leases, which are a special type of commercial lease, do have statutory restrictions imposed on the timing and method of increasing rent during the term of the lease.

6. Can a tenant assign the Lease, or sublease, without landlord’s consent?

Generally, unless the Lease specifically prevents assignment or sub-leasing, the tenant has that right and doesn’t require the Landlord’s consent. However, most Commercial Leases will contain a term requiring the Landlord’s consent to be obtained before the Lease can be assigned or sub-let, or prohibiting it entirely.

7. What is a Security Deposit?

A security deposit is typically an amount equivalent to one or two month’s rent, which is deposited by the tenant to secure, as far as money can, the tenant’s performance of the tenant’s obligations under the Lease. Under the Retail Leases Act 1994 (NSW) a Landlord is required to lodge a security deposit with the Director-General of the Department of State and Regional Development. However, under your normal Commercial Lease, a Landlord generally is at liberty to deal with the Security Deposit as they see fit, so long as it is repaid, in part or in full, if required under the Lease.

Related Article: Why should I require security if I’m a landlord and leasing my commercial or retail premises?

8. Are there any formal requirements for the execution of a lease?

For land under the provisions of the Real Property Act 1900 (NSW) (which is most land in NSW) a Lease for a term in excess of three (3) years must be effected by executing a Lease in the approved form and the Lease must be registered, in order to pass to the Tenant an enforceable leasehold estate. If such a Lease is not registered, the Tenant would only have an equitable interest and it would be unenforceable against a competing registered interest.

9. If a commercial building gets a new owner, can the new owner renegotiate the existing lease?

No, unless the tenant is a willing negotiator.

If you purchase a commercial building with an existing lease, the term of which extends into your ownership, then you own the property subject to that lease.

As to whether the tenant will likely be a willing negotiator… this will depend on their circumstances. In short, if there is a benefit to the tenant then they will likely be a willing negotiator. For example, if there is one year left on the lease and the tenant would like to remain in the premises for a period longer than that, then there’s no reason why you can’t negotiate with the tenant to extend the term of the lease.

If you are a landlord in this situation you need to target those things that will result in the tenant achieving an improved position, as well as you, if you are going to achieve a favourable outcome

10. Who gets to keep the registered commercial lease?

In most situations, the registered commercial lease is duplicated and both parties receive a copy.

However, only one of these copies will have a ‘registration sticker’ from Land & Property Information (LPI) affixed to it. This copy is usually held by the landlord.

• Commercial Leases: Understanding the Basics
• Commercial Leases: Get Them In Writing!

Gavin Hanrahan

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• Lease assignments can come back to haunt you. Assignors remain liable for the obligations of the lessee under an assigned lease.

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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This information aims to help you complete an electronic Lease dealing form. This form can also be used to create a sublease. An electronic Lease dealing form can be lodged where it affects the whole of the land, part of the land and premises by all the registered proprietors.

Requirements:

From 6 February 2021, only the lessor is required to be represented in the workspace for this dealing form. An electronic Lease dealing form is a single party instrument that is prepared and signed by the lessor’s Subscriber. It must be accompanied by a copy of the terms of the lease that is signed by or on behalf of the lessor and lessee i.e. the paper Lease 07L form is not required to be attached. The lease can incorporate terms and conditions that are set out in a Memorandum filed with NSW LRS. It can include a plan if the lease affects part of land. A lease of part of the land or premises affecting multiple land titles in different ownerships must be lodged as a separate lease for each land title in different ownership.

Legislation:

A lease for a term exceeding 3 years must be registered in order to pass a legal interest to the lessee: see section 53  Real Property Act 1900  which requires a lease to be registered in the Approved Form. A lease for a term of 3 years or less, including an option to renew, may be registered.  Where a retail shop lease is for a term of more than 3 years, including any options to renew, or the parties agree that the lease is to be registered, the lessor must lodge the executed lease for registration within 3 months after the lease is returned to the lessor or the lessor’s representative: see section 16  Retail Leases Act 1994 .

Types of leases  to be lodged as a Dealing with Exception :

An electronic Lease dealing form cannot be used (and accordingly a paper lease form 07L must be lodged as a  Dealing with Exception ) in the following instances: A Lease 

• by a life tenant
• by a mortgagee or chargee in possession
• by National Parks and Wildlife, i.e. Kosciuszko leases
• by the Land Administration Ministerial Corporation
• of the whole of the land where an easement is being created or reserved during the term of the lease
• of premises for a term exceeding 25 years which is reliant on a registered plan or memorandum.
• of a public reserve
• over 20 land titles
• requiring marking by Revenue NSW
• by less than all of the registered proprietors
• including a carry-over term
• for the life of the lessee or for the life of another person 
• with an uncertain term or a term measured in other than days/years, including where the lease commences on the happening of a certain event
• where a leasehold title is to be created
• that is a concurrent lease.

Implied surrender of lease:

A current lease noted on the Register may be surrendered by an incoming lease, i.e. an implied surrender, if the incoming lease:

• is to all of the current lessees, or is accompanied by the consent of the current lessee
• affects at least the same land or premises
• commences before the expiry of the current lease and
• is not made subject to the current lease.

An extra fee is payable for the implied surrender.

Registered proprietor holding as executor or administrator or trustee:

The lease must not include any reference to the lessor or lessee being a trustee, executor or administrator for another party. For a lease by a registered proprietor holding the estate as executor or administrator, the term must not exceed three years, including any options to renew: see section 153  Conveyancing Act 1919 . For a lease by a registered proprietor holding an estate as a trustee, the term must not exceed 5 years, including any options to renew, except if it is allowed within the trust instrument: see section 36  Trustee Act 1925 .

Easement by inclusion in a lease:

An easement may be created by grant or reservation by the parties to a lease if the parties are the registered proprietors of both the dominant and servient tenements: see section 47  Real Property Act . The terms and site of the easement may be contained in an annexure to the lease and may be referenced in an attached plan. Currently, only a lease over part of the land where an easement is being created or reserved during the term of the lease can be lodged electronically. Where a lease is over the whole land and an easement is being created or reserved, the electronic Lease dealing form cannot be used (and accordingly a  paper lease form 07L  must be lodged as a  Dealing with Exception ).

Subscriber requirements

Before lodging this document electronically via an Electronic Lodgment Network, a Subscriber must:

• verify their Client’s identity
• establish their Client’s right to deal with the land
• have a properly completed and executed Client Authorisation form, and 
• retain evidence that supports the dealing ( see Supporting Evidence below ).

The Subscriber must also certify that they have taken reasonable steps to ensure that the instrument is correct and compliant with relevant law and any Prescribed Requirement. For more information on these requirements see: Residual Documents

Guide to complete

Legislation  – section 53  Real Property Act 1900 . Stamp Duty  – not required. Notice of Sale  – not required. Standard Form of Caveat  – a caveat noted on the Register will prevent the recording of a Lease, except where it is a lease by a mortgagee or chargee in possession. Priority notice noted on the Register  - see  Priority Notice  page for more information. The following headings refer to the data fields which must be completed in order to lodge an electronic Lease dealing form. Party type Select one of the following to specify the party type of the lessor:

• organisation or
• ​individual.

Land Titles Reference Enter the title reference(s) affected by the Lease. Land Extent Select whole of the land or part of the land. Description If part of the land is selected, enter the details. The details must include the following:

• premises which is  not  the whole of the land  - the description of property leased must refer to part folio of the Register followed by the premises description (see premises below), e.g. Part 1/123456 being Unit 1, 11 Smith Street, Sydney.
• part of the land for 5 years or less , including any options to renew, must fully describe the affected part by reference to a registered plan, a plan attached to the lease, or to another registered dealing. See information on  Lease Plans .
• part of the land for more than 5 years , including any options to renew, other than a lease lodged by the Commonwealth of Australia, must describe the affected part by reference to a registered plan of subdivision that has been approved by the local council. See section 23F and section 23G  Conveyancing Act 1919 . See information on  Lease Plans .
• premises  must be fully defined by either:
• - a unique description such as a shop name or number together with a full postal address (where the shop does not have a shop name or number and it is the only shop within the lot(s) affected by the lease, a letter stating that information must accompany the lease), or
• - a plan annexed to the lease.
• premises for a term exceeding 25 years  must be accompanied by a  plan defining the premises . The plan does not require local council's approval.
• car spaces  intended to be included in the leased premises must be clearly numbered. Where car spaces are not clearly identified, e.g. 'together with 1 car space' rather than 'car space No. 1', a requisition will be raised. Reference to car spaces elsewhere in the lease will be regarded as rights and will not be included in the lease notification. Where the car spaces are also shown in an annexed plan, dimensions of the car spaces must be included in the plan.
• easements -  where an easement is being created or reserved during the term of the lease, enter details of the easement or refer to the easement being created. The details may be set out in an attachment.

An extra fee is payable where the land description is reliant on a plan annexed. See the Attachments section below for information about attaching a plan. Interest in Land If a sublease is being created, select the registered number of the head lease for a sublease. The head lease must be registered with NSW LRS prior to the lodgment of this sublease. Lessor Details Select one of the following options:

• Proprietor on title  – select this option if the lease affects the current registered proprietor(s). The lessor name must be identical to the name of the registered proprietor as shown on the Register.
• Incoming proprietor  – select this option if the lease affects the incoming proprietor.
• To deal with an interest  – select this option for a sublease.

The lessor's name will be populated into this field. If the lessor is a corporation, its ACN must be included.  Lessee Details The lessee's name will be populated into this field. If the lessee is a corporation, its ACN must be included. Tenancy Type If there is only one lessee, select  sole proprietor . If there is more than one lessee, select one of the following: Joint tenants  or  Tenants in common  and enter the share of each lessee. For more information about tenancy types, see  What is tenancy?  page. Lease Details Term  - Enter the term of the lease by entering the year(s), month(s) and day(s). Commencing Date  – Enter the commencing date.  Terminating Date  – Enter the terminating date. The termination date of a sublease must be at least 1 day before the termination date of the head lease. The term must align with the commencing and terminating dates entered. Rent Details Information about the rent must be specified. Four fields are available to be used, to give flexibility to complete the lease, but only two fields are mandatory (Terms of Payment and Rent Description). The fields Amount and Payment Frequency are optional and can be ignored if those details are covered in the body of the lease. Amount  – This is an optional field. Enter the rent amount payable. Only numbers can be included. If an amount is specified, payment frequency must also be specified. Payment Frequency  – This is an optional field. Select the frequency of payment, being daily, weekly, fortnightly, monthly, quarterly and yearly. If the frequency is specified, the amount must also be specified. Terms of Payment  – This is a mandatory field. Enter the terms of the payment or refer to the clause or provision in the lease that deals with payment of rent. For example, you may enter ‘See clause 5 of the attached Conditions and Provisions’. Otherwise enter N/A if not applicable. Rent Description  – This is a mandatory field. Enter any additional rent information, such as a description of the rent payable or the frequency of payment. For example, you may enter ‘Amount is inclusive of GST’. Otherwise enter N/A if not applicable. Option to Renew Select Yes or No.  Option to Renew Period If applicable, enter the renewal period by entering the year(s), month(s) and day(s). Option to Purchase Select Yes or No.  Registered Memorandum Enter the dealing number of the registered memorandum. Attachments Attachment Type - Conditions and Provisions The terms of the lease signed by or on behalf of the lessor and lessee must be attached to the dealing under ‘Conditions and Provisions’. Plans, consents and other documentation intended to be filed with the lease can either be uploaded together with the lease or uploaded as separate attachments. To attach them separately, see other attachment types below. Attachment Type – Mortgagee’s Consent/Minister’s Consent/Caveator’s Consent (optional) The consent of a mortgagee, minister or caveator may be required. Where it is required, the relevant consent of the mortgagee, minister or caveator must be attached. Minister's consent may be required for certain Crown land tenures. Attachment Type – Plan (optional) Attach a plan where the description of the part of the land (and/or any easements created) or the premises to be leased is reliant on a plan annexed. Attachment Type – Statutory Declaration (optional) Attach a statutory declaration if required. Attachment Type - Supporting Evidence (optional) Other documentation intended to be filed with the lease may be attached as supporting evidence. For example, the details of an easement may be contained in an attachment. Lessor’s Acknowledgement The following statements will appear on the electronic Lease render: THE SUBSCRIBER VERIFIES THAT THE ATTACHED LEASE HAS BEEN SIGNED BY OR ON BEHALF OF A PERSON PURPORTING TO BE THE LESSEE. THE LESSOR DECLARES, TO THE BEST KNOWLEDGE OF THE SUBSCRIBER, THAT REGISTRATION OF THE LEASE IS NOT PRECLUDED BY ANY OPTION OF RENEWAL/PURCHASE IN A REGISTERED LEASE.​ NOTE:  The statement relating to options can be ignored if there are no options recorded on the Register.

Supporting evidence

In addition to evidence supporting the steps taken by the Subscriber to verify the identity of their Client and establish their Client’s right to deal, the Subscriber may be required to retain other evidence to support the dealing. The evidence that the Subscriber is required to retain to support a Lease dealing form may include:

• a true copy of the duly executed version of the document(s) and
• if the Conditions and Provisions has been signed by an attorney on behalf of the lessor or lessee, a true copy of the registered power of attorney.

It is a matter for the Subscriber to be satisfied that they have met the requirements for the dealing. Please refer to the ARNECC Guidance Note 5 for assistance on retaining evidence to support conveyancing transactions in accordance with the NSW Participation Rules. All NSW legislation can be accessed at  www.legislation.nsw.gov.au  

Publication Date: August 2024

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CPN 027: Leases and change in beneficial ownership

Chapter 2 of the Duties Act 1997 (“ Act ” ) charges duty on transfers of dutiable property and other transactions which include a surrender of an interest in land and a lease in respect of which a premium is paid or agreed to be paid. From 19 May 2022 the Act also imposes duty on transactions that result in a change in beneficial ownership of dutiable property other than excluded transactions.

Under Clause 145 of Part 53 of Schedule 1 to the Act , Section 8(1)(b)(ix) of  the Act does not apply to a transaction that occurs on or after 19 May 2022 if the transaction occurs in accordance with an agreement or arrangement entered into before 19 May 2022.

This practice note outlines the circumstances when the grant of a lease will be dutiable and must be read in conjunction with CPN 025 - Change in Beneficial Ownership.

Section 8 of the Act operates to charge duty on certain specified transactions dealing with dutiable property. Section 8(1)(b)(ix) of the Act provides that duty will also apply to another transaction that results in a “ change in beneficial ownership ” of dutiable property unless it is an “excluded transaction”. Excluded transactions include “the grant, renewal or variation of a lease for no consideration” (paragraph (e)). Excluded transactions also include any transactions of a kind prescribed by the regulations (paragraph (k)) and a combination of transactions referred to in paragraphs (a) – (k). The Duties Regulation 2022 includes the following additional excluded transactions relevant to leases:

• the creation, variation, or surrender for no consideration, of a tenant’s interest in fixtures that are fit-out for commercial premises (paragraph (f))
• a change in tenancy under a lease for no consideration (paragraph (g))
• the expiry, extinguishment or merger of one of more leases for no consideration (paragraph (j)).

Commissioner's Practice Note

Section 8(3) of  the Act defines the change in beneficial ownership to include the creation and the extinguishment of dutiable property. This will include the grant of a lease of land in NSW unless there is an exclusion or an exemption. Leases granted without a premium or other (monetary or non-monetary) consideration generally will not attract duty.

Note: Lease is defined in section 8(3) of  the Act as a lease of land in NSW or an agreement for a lease of land in NSW.

What is consideration for the grant of a lease?

Consideration for the grant of a lease includes monetary consideration and/or the value of the non-monetary consideration. Monetary consideration includes any amount paid or payable by the lessee for the grant of the lease. This does not include amounts paid or payable for the right to use the land being rent or rent reserved. Outgoings such as rates, charges, taxes etc are not treated as consideration or premium for the grant of a lease.

Note: If the lease is granted for monetary consideration, the Chief Commissioner will generally not require a valuation. Duty will be calculated on the consideration paid or to be paid.

In Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 , Dixon,J stated that the word “consideration” should receive the wider meaning or operation that belongs to it in conveyancing rather than the more precise meaning of the law of simple contracts. Consideration is the money or value passing which moves the conveyance or transfer.

In Frazier v Commissioner of Stamp Duties (NSW) 85 ATC 4735, the Court considered that the question of whether a sum is premium or rent is to be determined by deciding firstly whether it is a payment required as a consideration for the granting of the lease or whether it is a payment for the use and enjoyment by the lessee of the land. Where a lump sum payment, even if described as rent in advance, is not proportionally refundable by reference to the unexpired term of a lease on an early termination of the lease, it is generally treated as a premium and not as rent.

Improvements constructed by the lessee can take the character of prepaid rent where they are credited against an obligation to pay rent or are accepted by the landlord in satisfaction of an obligation to pay rent, and there is a right of proportionate refund (payment) in the event of an early termination of the lease (other than through the default of the lessee.)  [2]

Note : If the lease is granted for monetary consideration, the Chief Commissioner will generally not require a valuation. Duty will be calculated on the consideration paid or to be paid.

Example 1: ABC Pty Ltd as lessee enters into a 6-year lease of commercial premises in a regional city at a rent of $500 per week. At the commencement of the lease there is a non-refundable upfront payment made by ABC Pty Ltd of $160,000 for the grant of the lease.  Duty will be payable on the premium of $160,000 under section 8(1)(b)(viii) of the Act. No duty is payable under section 8(1)(b)(ix) of the Act and no duty is payable on the rent.

Example 2: ABC Pty Ltd as lessee enters into a 6-year lease of commercial premises in a regional city at a rent of $500 per week. At the commencement of the lease ABC Pty Ltd makes an upfront payment of $160,000. This amount is characterised as a combination of a prepayment of rent, the unused portion of which is refundable upon termination of the lease (other than through the default of the lessee, and there are no “break fees” or penalty arrangements) and a “guarantee payment” of $4,000.  In this case, the $156,000 ($500 x 52 x 6) attributable to the prepayment of rent will not attract duty and only the amount of the $4,000 guarantee payment will attract duty under section 8(1)(b)(viii) of the Act as premium. No duty is payable under section 8(1)(b)(ix) of the Act.

A grant, renewal or variation of lease for no consideration is generally not dutiable [3] . Rent is not consideration for the grant of a right to lease the property, but rather a payment for the use and enjoyment of the property by the lessee. It follows that leases where only rent is paid or payable will not be liable to duty. Examples include retail, commercial and residential leases entered into on ordinary commercial terms. Leases or agreements to lease where consideration other than rent is paid or payable for the grant of the lease or the agreement will be liable to duty calculated on that consideration.

A lease or an agreement for lease in respect of which a premium is paid or agreed to be paid is liable under section 8(1)(b)(viii) of  the Act and will not be dutiable again under section 8(1)(b)(ix) on the premium. However, it could be liable under section 8(1)(b)(ix) of the Act on any other consideration other than premium [4] .

However, under section 8(2A) of the Act , an excluded transaction that results in a change in beneficial ownership of dutiable property is a dutiable transaction if it is part of a scheme or arrangement that, in the Chief Commissioner's opinion, was made with a collateral purpose of reducing the duty otherwise chargeable.

Example 3: A lease between a landlord and ABC Pty Ltd has 4 years left to run. XYZ Pty Ltd agrees to purchase the business and assets of ABC Pty Ltd. Rather than agree to a transfer of the lease, XYZ Pty Ltd enters into an agreement with the landlord for a new lease and ABC Pty Ltd and the landlord enter into an arrangement such that the existing lease term is varied to expire in a day.

Depending on the circumstances, including the values of the leases involved, the Chief Commissioner may be of the opinion under section 8(2A) of the Act, that the grant of the lease to XYZ Pty Ltd and/or the variation of the lease to ABC Pty Ltd was made with a collateral purpose of reducing the duty otherwise chargeable on the transfer of the original lease such that the grant of the new lease to XYZ Pty Ltd and/or the variation of the original lease is a dutiable transaction. Penalties may also apply under Part 10A of the Taxation Administration Act 1996 .

Other transactions that may be liable to duty

Certain transactions not already covered above or liable under section 8(1)(b)(iii) or (viii) could be liable to duty under other sections of the Act . If they are liable under another section of the Act , they will not be liable again to duty as a change in beneficial ownership. The following are some transactions that could trigger duty either under section 8(1)(b)(ix) or any other section in the Act .

• early termination of a lease by the lessor for various reasons including to grant a new lease to another lessee, or to sell the premises, involving consideration for the arrangements,
• grant of a lease where the lessee pays or agrees to pay the lessor’s legal fees which are non-refundable and is greater than $1,000. Payment of legal fees by way of or instead of rent will not be dutiable on an extension or renewal of the lease [5]
• an option to lease land in NSW for premium [6]
• an assignment of a lease [7]
• a novation of an agreement for lease  [8]
• attornment of leases on sale [9] .

Transactions that may be not liable to duty

Transactions that are not liable to duty and/or are exempt under other sections in  the Act will also not attract a liability as a change in beneficial ownership. Examples include:

• the termination of a lease by the lessor before the expiry date where the lessee is facing hardship and there is no value passing to the lessor,
• early termination by the lessee for various commercial reasons and a payment is made to the lessor in compensation for the rent lost by the lessor,
• an option to a right to occupy/lease premises in a retirement village within the meaning of section 5 of the Retirement Villages Act 1999 [10] ,
• a lease or agreement for a lease of residential premises used, or intended to be used, exclusively as a residence  [11]
• a lease or agreement for a lease of a movable dwelling site used, or intended to be used, as the principal place of residence of the lessee [12] ,
• an extension or renewal of a lease where the lessee pays legal fees as or instead of rent,
• an option to extend or renew a lease.

A lease granted for non-monetary consideration

A liability to duty will arise if a lease is granted or an agreement for a lease is made for non-monetary consideration. For example, where the lessee is under an obligation to undertake improvements to the land and, under the terms of the agreement for lease or leases, the improvements are to become the property of the lessor at the end of the lease. The value of the improvements passing to the lessor could be significant depending on the improvements at the time the property and the improvements pass on to the lessor. Revenue NSW will monitor these transactions more closely.

If a lease is granted for non-monetary consideration comprising improvements to the property,  the full cost of the construction (including builder margins) undertaken or to be undertaken by the developer is taken to be the value of the improvements. This value is determined on entry into the agreement for lease or a lease.

Note: The lease or the agreement for lease will generally not require a reassessment if the cost increases or decreases after the lease or agreement for lease is assessed for duty.

Value of non-monetary consideration

The cost of the improvements and additions to the leased premises made or to be made by or on behalf of, or at the expense of, the lessee under an arrangement or covenant by the lessee (other than fit-out costs) will be the percentage attributed to the value that will be for the benefit of the lessor when the leased premises reverts back to the lessor. As a general matter, the longer the term of the lease, the lower the value of the improvements passing to the lessor. This is because the improvements will depreciate over time as will the value of the improvements that the lessor receives at the end of the lease.

Evidence of the value of the improvements must be provided by the lessee/developer at the time of stamping of the lease or agreement for lease. If a valuation is not provided or if the value does not seem reasonable or appropriate, the Chief Commissioner may assess duty on the basis of a valuation or other evidence.

However, in lieu of evidence of value, the Chief Commissioner is prepared to accept evidence of the cost of improvements and to use the following methodology to calculate the proportion of the value attributable to the improvements as the dutiable value for the dutiable transaction that is the grant of the lease. The dutiable value of the improvements will be the cost of the construction activities including GST.

Note: For these purposes, improvements include the cost of public works constructed on the leased premises and surrounding areas, on the basis that these improvements enhance the amenity and income producing potential of the buildings constructed by the lessee.

Note: The term of the lease does not include option periods.

Example 4 : The Landholder grants XYZ Pty Ltd a lease for 99 years. The lease is conditional on XYZ Pty Ltd constructing an office building, public works on the leased area and surrounding areas. Ordinarily all of the value would accrue to the builder/ lessee, and unlikely to be any value of the building passing to the lessor. As the lease is more than 50 years, the Chief Commissioner will accept the dutiable value to be nil and no duty will be payable and no evidence of value or cost will be required to be produced .

Example 5 : The Landlord grants XYZ Pty Ltd a 15-year lease of an industrial building. The lease is granted for a peppercorn rent. The lease is conditional on the lessee making improvements to the currently dilapidated industrial estate. The improvements cost $20 million. However, as per the above table, the dutiable value will be 75% of the cost of the improvements, and duty will be calculated on $15 million.

Example 5A : The Landlord grants XYZ Pty Ltd a 15-year lease of an industrial building. The consideration for the use of the premises under the lease is a prepaid rent of $15 million. There is no separate consideration for the grant of the lease. The lessee can satisfy the obligation to pay rent by either the payment of cash, or by the construction of improvements with an agreed value of $20 million. In either case, if there is an early termination of the lease (other than through the default of the lessee), the lessee is entitled to a proportionate refund. No duty is payable even if the lessee constructs the improvements, as it takes the character of prepaid rent.

Example 6 :   The Landlord grants XYZ Pty Ltd a 15-year lease of an industrial building. The lease is granted for a peppercorn rent. The lease is conditional on the lessee making improvements to the currently dilapidated industrial estate. The improvements cost $20 million. A valuation is prepared showing that the evidence of value of the improvements after 15 years is $12 million.  The lessee submits a valuation on this basis and after analysis of the valuation, this is accepted by Chief Commissioner and duty will be calculated on $12 million.  

Example 7: Goodhealth Pty Ltd was awarded the contract by the NSW Health under a Public Private Partnership project to build a hospital in Southwestern Sydney. The lease for 60 years is conditional on Goodhealth Pty Ltd planning, developing and constructing a hospital. Goodhealth Pty Ltd will lease the hospital for less than market/arm’s length fee. The cost of the construction will be the consideration for the grant of the lease. However, as the lease is for 60 years, the Chief Commissioner will accept the dutiable value to be nil and no duty will be payable and no evidence of value or cost will be required to be produced .

Example 8: Prodev Pty Ltd, a development company, has an agreement with the owner of the land to develop the land. Prodev Pty Ltd pays $5 million for the grant of a 4-year construction licence to enter the land and the adjoining land to undertake the approved works. The development includes site works, public works and building works consisting of new residential development. The development costs are estimated to cost $95 million. When the building is completed, Prodev Pty Ltd is granted a 99-year lease over the development.

The 4-year construction licence with an upfront payment of $5 million for the grant of the licence is not liable as it is not a premium for the grant of a lease. The 99-year lease is granted with building works (non-monetary consideration) of $95m will not be liable to duty under section 8(1)(b)(ix) of the Act.

However, if the lease is for 20 years, then the duty payable will be on 75% of $95 million i.e., duty on $71.25 million.

Example 9: Prodev Pty Ltd is a development company which has an agreement with the owner of the land to develop the land. Prodev Pty Ltd pays $5 million upfront as premium for the grant of a 4-year lease to enter the land and the adjoining land to undertake the approved works. The development includes site works, public works and building works consisting of a new residential development. The development costs are estimated to cost $95 million. When the building is completed, Prodev Pty Ltd is granted a 99-year lease over the development.

The upfront payment of $5 million for the grant of the lease is a premium and is liable to duty as a premium under section 8(1)(b)(viii) of the Act. The 99-year lease granted with building works (non-monetary consideration) of $95m will not be liable to duty under section 8(1)(b)(ix) of the Act.

However, if the lease is for 20 years, then the duty payable will be on 75% of $95 million i.e. duty on $71.25 million.

Duty under sections 8(1)(b)(viii) & 8(1)(b)(ix) of the Act could be aggregated under section 25 of the Act.

• ^ The terms “beneficial ownership” and “change in beneficial ownership” and “excluded transactions” are defined in section 8(3) of the Act .
• ^ See example 5A.
• ^ Section 8(2A) applies to arrangements that, in the Chief Commissioner’s opinion, are made with a collateral purpose of reducing the duty otherwise payable.
• ^ See example 9 in the CPN.
• ^ See transactions that may not be liable to duty.
• ^ An amount paid or payable for the grant of an option to lease is taken to be a premium under section 8(3). Duty is payable when the option is exercised.
• ^ Liable under section 9B of  the Act or as a transfer of lease. Transfer includes an assignment.
• ^ Liable under section 9C of the Act .
• ^ Duty will only be payable in cases where the lessee seeks compensation from the lessor as a result of an early termination.
• ^ A lease of premises in a retirement village is exempt under section 65(16)(d) of the Act .
• ^ Section 53A(a) of the Act .
• ^ Section 53A(b) of the Act .
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