When the landlord says “No” to an assignment of lease

The three big questions that Landlords ask when entering a new lease are highlighted below. A lease application or assignment can fail for any of these four reasons.

From a legal perspective, the Landlord can (in practice) only really deny an assignment when it can demonstrate that the lease assignment will materially  impact the strength of the covenant.

The three reasons discussed below are:

  1. CREDITWORTHINESS

Can you pay the bills?

A core element of having a strong lease covenant is of course the financial position the lessee/assignment finds themselves in. There are three challenges we face when assessing the financial strength of the lessee:

  • Being provided with all/ correct information
  • Gaining access to relevant information that is not willingly provided
  • Interpreting the information correctly (as it is often obfuscated)

Reading the financials is not something that is simply outsourced to a credit agency, but the results must be interpreted in the context of the particular demands that retailing makes on financial resources and on an intimate understanding of the flow of cash which is contingent on the business model adopted. You need more than accounting nous, you need appreciation of the unique nature of retail systems to make meaning of the numbers.

  1. EXPERIENCE

Are you able?

People with a one-dimensional view of ‘experience’ will regards experience as something that a person has done that is the same. The reality is that (a) all people had to start somewhere and everybody started with zero experience and (b) there are many experiences that can serve to prepare one for a running a retail business.

The landlord obviously needs to make a fair and reasonable assessment of the relevant elements in the background of the person taking on the lease obligations. It is not as simple as equating the prior years’ experience with being more or less qualified to run the business. There are qualitative factors to consider as well.

  1. PREPAREDNESS

Are you ready and willing?

It is not about motivation as much as it is about understanding what is required. Most people starting out don’t do it with the expectation of failure, yet most fail.

This is why landlords ask for Business Plan. We all know the plan in and of itself won’t make you successful, but it is a document that illustrates (a) what you are thinking will happen and (b) indicates how realistic or not your assumptions are.

Unless Landlords engage independent consultants, they find it difficult to decline a request for assignment because it is difficult to assess these criteria objectively and conclude that the assignee is not suitable. (With the exception of financial viability, landlords rarely decline assignments, even when they should.)

But if a request for assignment is denied, chances are they are doing you a favour.

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