The Gentle Art of Landlord Consent

What follows is not legal advice. It is a series of short, one-minute think-pieces on one of the most recurring challenges we are asked to consult on – securing landlord consent to the assignment of a retail lease in New South Wales. The intended audience is business brokers and business sellers.

The whole story

25 June 2024

Time invested in crafting a complete and accurate sales advice is not wasted. It is stored.

A complete sales advice helps set the gap between buyer and seller as narrow and as short as possible, leaving nothing to the imagination.

If there is to be no trial – say so. Include an express statement the price has been arrived at on the condition there is to be no trial, or variation to the lease or whatever the case may be. Do not invite debate on terms that were never on the table.

Staying silent is not a short-cut.

Start at the start

21 June 2024

An application for landlord consent to the assignment of lease starts with a request. The Retail Leases Act sets out the basic procedure which is often mirrored in the lease. Absent compliance with this procedure a landlord is not obliged to consider an application nor is a landlord subject to any time limit for a decision.

Sellers would do well to tick the right boxes in the right order.

Before hitting send, has the procedure in the Retail Leases Act been complied with – to the letter ?

Curiosity

18 June 2024

Trawling through case law you often find a judge, although only making a passing comment, actually shines a bright light on some suspect behaviour. In one such instance, a tenant had complained the landlord would not consent to the transfer of the existing lease but was prepared to negotiate a new lease with the buyer.

Being polite, the judge called out the landlord’s behaviour as “curious” and went on to find the refusal had nothing to do with the solvency or suitability of the new tenant. Rather, the landlord wished to seek more favourable terms by negotiating a new deal.

The tenant still lost (on that point) because he could not show that he had followed the proper procedure for requesting consent.

Short cuts

8 June 2024

Before hitting send, does the application invite an easy, obvious and irresistible conclusion that the buyer is not inferior to the seller in financial resources and retailing skills ?

Answer honestly.

More often than not, sellers invite the landlord to make a decision on incomplete information in the hope it saves the time involved in preparing a full and properly supported application. Those type of short cuts lead nowhere.

Ego

27 May 2024

The best way to deal with a big, opposing ego is to make room.

Landlords (and anyone else for that matter) cannot be persuaded until they are open to being persuaded. To reach that point, they need to be made to feel safe. One way to do that is to use language that validates their position, reminds them of the common goal and how that intersects with their interests.

Arguing risks the sale. Winning an argument is pointless if it means losing the sale. It stands to reason that in this space being able to persuade is more important than being right. If big, dominating egos are at play making them feel safe could be a small price for securing consent.

Apples with apples

7 May 2024

Many moons ago there was a 400 seat seafood restaurant with excellent harbour views.

The owners of the restaurant found a buyer who was knocked-back by the landlord. The business owners challenged the refusal in court. The court looked at the way retailing skills are compared.

In short, to arrive at a meaningful outcome the skills had to be similar enough to permit a “ready comparison”. In this case, the skills had to be in operating “some kind of restaurant” of similar style and size but not necessarily an identical business.

Rather than leave it to chance, sellers would do well to quickly provide the landlord with a readily apparent and sensible means of comparison.

A heap of sand

1 May 2024

An ancient Greek philosopher once asked if a heap of sand is reduced by a single grain at a time, at what point does it cease to be a heap of sand ? It has spawned endless debate that continues today. It is known as the sorites paradox.

Comparing the retailing skills of a buyer and seller also creates a paradox. The test of not-inferior retailing skills is inherently vague. To make sense, it should involve an assessment of quality (skills in the game) and quantity of skills (time in the game).

Each factor should be appropriately weighted so that the final comparison is at the very least logical. Otherwise, a long retailing resume dotted with business closures, bankruptcies and disputes would be preferred to a shorter track record of retailing brilliance.

Standard tenancy applications

22 April 2024

Tenancy applications are used by managing agents to single out a suitable candidate from a mass of potential tenants applying to lease empty premises. They are not designed to facilitate landlord consent to the transfer of an existing lease by an existing tenant to a single candidate (the buyer).

Giving the landlord’s agent access to the financial means of potential new tenants, is designed so the agent knows how deep their pockets are before making them an offer.

Alone, standard tenancy applications do not set up the careful comparison between a seller’s (tenant) and buyer’s (new tenant) financial resources. Because of this, they are incompatible with the landlord consent process.

Setting up the correct basis for the comparison between seller and buyer is key. Sellers should be slow to submit a tenancy application on behalf of the buyer without it telling the whole story. More on this below.

Desirability

9 April 2024

Landlords do not like change. Left undisturbed they will remain inert, happily collecting their rent and good on them. Who of us likes to be disturbed, particularly when change creates no value ? Faced with a change of tenant, a previously inert landlord may fight hard for things to stay the same.

Here lies the opportunity. To provide the landlord a compelling reason beyond the normal statutory tests, to approve the transfer of the lease to the buyer.

Power is a function of desirability.

What makes this buyer desirable as a tenant ? A good place to start would be to discern how undesirable the selling tenant is and play to that. The seller knows what a buyer could do “better”.

Assumptive

3 April 2024

A landlord has 28 days to give notice granting or withholding consent to a request for a transfer of lease. Longer if the tenant has not properly complied with its disclosure requirements under the Retail Leases Act (NSW).

A month is a long time. Landlords can sit on their hands and they often do. For borderline applications this time is best used trying to create an assumptive narrative. One of ready and willing parties growing impatient at the delay.

Being assumptive means using language that assumes landlord consent will be forthcoming and positioning the seller and his team as well-intentioned and confident.

Such language carries a double message. First, the application should not take long to approve. Second, if it is not approved expect a reaction. Developing this narrative gives a selling team a ready platform from which to deliver that reaction then pivot.

Teamwork

27 March 2024

It is long established that to unlock landlord’s consent a business seller must be able to objectively demonstrate the buyer is able to deploy retailing skills that are not-inferior to those of the seller. The seller is the tenant. The tenant is often a company, existing only on paper. It is not the company that talks to customers, designs the menu, bakes the muffins or makes the coffee – its employees do.

In the food and beverage space, you often hear of “good operators” with decades of experience. However they did not in fact, talk to every single customer and make every single coffee and perform every task associated with the business in that time. The team did. It is the team that does the retailing. The skills of the team count. Surely, the “good operator” may be part of the team but here lies the opportunity.

If an experienced seller invites the landlord to make a comparison between him and a less experienced buyer as individuals and not the team, he has only himself to blame.

Retailing skills

19 March 2024

Search and you will find various definitions for retailing :

To sell goods to the public by retail – the sale of goods in small quantities to ultimate consumers – the activity of selling goods to the public in stores or on the internet – the sale of goods directly to the people who use them, in small quantities.

The obvious common thread is the act of selling. It is a mistake to conflate the ability to perform one role in a retail business with retailing skills. Take a restaurant for example, is a chef really involved in the act of selling ?

By the same token, must a buyer be able to execute all the tasks associated with the operation of that business like peeling potatoes, folding napkins and pumping out the grease trap ?

If a restaurant sale requires landlord consent to the transfer of lease, the test needs to be apples-with-apples. What retailing (sales) skills are being demonstrated by the tenant (owner) compared to the retailing skills the buyer can deploy ? Most often, the actual retailing is being done by staff not the tenant.

This is an objective test. It does not require a buyer to wear a cape and run a business single handedly.

Third party validation

7 March 2024

Leases are short. Time passes quickly. Buyers want to inherit a good working relationship with the landlord. To expect a buyer to want a doubtful landlord is forced into submission is short sighted.

All the more reason to let others do the heavy lifting. Landlords often seek third party validation by requesting reference material. Here the distinction between references and referees is not to be confused. A referee is a name and phone number. A reference is an original, signed endorsement speaking directly to the retailing skills or financial acumen of the buyer by drawing on real-life examples from the first-hand knowledge of the person giving the endorsement.

Third party validation material should be substantial and compelling. It is easier to accept the the opinion of a well-positioned third party, than an opportunistic application by a self-interested seller.

The interrogation

1 March 2024

“The landlord wants to meet the buyer.”

Can a landlord reject a buyer based on how well he performs during an interview ? Technically no, but it happens anyway which is why a request to meet often creates apprehension. As if somehow the buyer will say the wrong thing and torpedo the sale.

Nevertheless, meeting the landlord, his agents or centre management can be important as a token last step. An invitation to meet should be accepted slowly and only once all the doors and windows are closed, and everyone is invested in moving forward. In technical speak: contracts exchanged, conversations started, application made and target settlement date agreed.

The work remains in the preparation. If the application is sound and establishes objectively and in writing the buyer has not-inferior financial resources and able to deploy not-inferior retailing skills, then what is the purpose of the meeting ?

The selling team should find out whether the meeting is in fact the token last step. If not, what else does the landlord need, what does he hope to achieve ? Get the house in order first.

Meet once.

Jumping the gun

23 February 2024

Word for word, the Retail Leases Act (NSW) says a seller must “provide the lessor with such information as the lessor may reasonably require to be satisfied that the financial resources and retailing skills of the proposed assignee are not inferior to those of the lessee.”

The key word here is may.

A seller comes under no obligation to furnish information about the buyer, unless required by the lessor and that requirement is reasonable. That means that the request must come first. No request, no obligation to provide.

If a seller tries to streamline things by offering unsolicited information about the financial standing and retailing skills of the proposed assignee, then so be it. First impressions count. But instead of making a presentation, it may help to spark a conversation. Conversations offer more opportunities to right the ship.

Having a managing agent primed and engaged in the process by discussing the information that may be required is a good start. It has been said here before, getting parties involved in the approval process is part of the process.

Pivot

20 February 2024

Landlords don’t like getting their hands dirty. Leasing executives and managing agents are their buffers, insulating them from the dust and noise of tenant relationships.

When communicating with agents compose emails knowing they will be forwarded as-is to the landlord. Keep the language clear and simple. Make the landlord feel good the agent is protecting his position then pivot to a statement that is hard to argue against – like having complete information.

In this example, John is a leasing exec. He has just rejected the buyer.

Dear John, thanks for your feedback. Given the way things have unfolded, I can see why the landlord would lean towards a no. But still, neither of us want the landlord to make a decision based on incomplete information. I am sure there is more to this story. Let me get the full picture and come back to you.

You can only steer a ship in motion. As far as the parties are concerned, a rejection is not the end of the story.

Do not dig in, pivot.

Date of comparison

14 February 2024

Again with a true story. Café was successfully run by three directors. Two directors quit and the business closes. The landlord knocks back the buyer because of inferior retailing skills.

Court decides that because the business had ceased to operate, the seller was displaying no retailing skill, so any retailing skill of the buyer would be greater than those currently demonstrated.

Remember, the effective date of comparison should be the date of assignment, not the start date of the lease or when the business was at its peak.

Do you have access to sales reports (shopping centre tenants have to report monthly) ? Have the sales plateaued or are they trending downwards ? What quality of skills are being demonstrated ?

The application of retail leasing laws vary widely based on the specific facts involved. If you are staring down the barrel get in touch via the Contact page on this website.

Deploy

8 February 2024

True story. A high profile restaurant goes into administration. Its sole director is a shining star in Sydney food circles with deep experience. Landlord refuses consent to the transfer of lease, says buyer has inferior retailing skills.

The tenant’s administrators challenge the refusal in court. The administrators win. The court decides because the administrator has taken control, the director’s skills are not actually being used, so they count for nothing.

The lesson here is to sharpen the comparison. It is not the retailing skills a buyer “has”, but rather what skills the buyer can “deploy” in the business. If the buyer has the cash but not the CV, consider what skills can it deploy through others and what role (if any) the key person behind the seller is playing.

Preventative maintenance

5 February 2024

If you are in the business of selling businesses and landlords and their lawyers do everything you want them to do when you say, then this post is not for you.

If you believe a little bit of preventative maintenance helps keep everything moving, then you might get something from the following paragraphs.

Before exchange brokers should check the terms and conditions of contract for gaps and blind spots. That is of course, if they want the sale to settle quickly.

When it comes to landlord consent the classic grey areas between the buyer and seller are – who does what, by when, who covers the costs, how long will it take and what happens if ? By checking the contract brokers can ensure the parties are sticking to the script.

Savvy brokers might also want to check the timing of the consent application, whether it happens before or after the satisfaction of other sale conditions such as a trial of business. It pays to remember, a buyer is not truly committed until he has parted with his money, or for our purposes – the sale has settled. An unscripted sale with a weak landlord consent mechanism will drag on.

Consistency

2 February 2024

So often what is written does not match what is said, or to borrow from one high-profile real estate sales trainer “the video doesn’t match the audio”.

Credibility comes from consistent messaging. It makes sense that to be believable a sales story must remain unchanged, not unravelling at the first sign of landlord difficulty. Confidence increases the more the players stick to the script.

If landlord consent difficulties are anticipated, then make them part of the sales script. Uncertain and unexplained difficulties create more anxiety than known and expected problems.

It follows that the work-around to those problems should be written into the contract. Outlined in earlier posts below, each documentation stage of the deal is an opportunity for the broker to write the correct script for the sale he has crafted. Do not leave it to the lawyers or some loose understanding of what the standard contract says. Craft a landlord consent mechanism that works and reinforce it consistently.

The right book

30 January 2024

If you are going to play by the book, use the right one.

If a landlord rejects the buyer, one playbook says threaten to take him to court – lawyers are lawyers after all. Hammers look for nails but for the most part, court is where sales go to die.

Going “legal” is usually a shortcut to a dead end. Arguments beget more arguments and the buyer feels like he is in a slow motion train wreck. The landlord hates the idea of you being his tenant so much, he is prepared to fight it in court – not exactly a heartwarming message for the buyer.

There are other playbooks, like the let’s-keep-the-buyer-focused-and-on-track. Which sounds salesy but you catch more flies with honey.

Having exchanged contracts, the focus should be on deescalating and keeping the buyer warm. That can be achieved by setting the right expectations vis-à-vis the landlord consent process with the buyer at each of the following stages : offer/acceptance, sales advice, contract and application.

The big deals are worth not fighting for. Pause and let that sink in. The landlord knows what’s good for him. A landlord will change his mind if it is in his best interests to do so, blunt force rarely works.

The never ending story

24 January 2024

It is mystifying how some brokers can sink huge man hours into a deal only to let go of the wheel when the sales advice is sent to the lawyers. Presumably the hope is that a few bullet points will be enough to prime the lawyers with the relevant data to secure the sale (and selling fee).

Here relevant data does not mean price, deposit, lawyers details and assorted scraps but rather the reality of the sale.

A seller’s lawyer is more than likely coming in from the cold, so tell the story. How long has the business been on the market ? Is this the best offer the business will ever get ? Has the seller won the lotto with this offer ? Why does this buyer need to be tied up quickly ? What awaits the seller if he loses this sale ? Where is the buyer weak ? Can sufficient retailing skills be demonstrated ? Where are the gaps ? What are the agreed work-arounds to the foreseeable problems ?

The story needs to be told, and retold. Once, when the broker picks up the phone to the seller’s lawyer and again, in the sales advice. The goal of telling and retelling the story is to tighten the contract. Why bother ? To secure the sale (and selling fee).

Buyer behaviour

22 January 2024

Whilst the focus on a lease transfer is usually on unlocking landlord consent, the buyer needs just as much love. If the buyer walks, the deal is dead.

Difficult news is rarely well received but news of formal rejection usually instils panic.

Buyer-side, delays and apprehension create doubt. He starts to question everything including the decision to move forward. He considers all the things that could go wrong, all the reasons why buying this business may not make sense. The question quickly surfaces, can I get out of this deal ?

To be fair, a buyer should never be in this position. It serves both the seller and the buyer to have a tight, fully tested business case for consent. If the seller wants to overcome the rejection, the buyer has to be a keen participant. If the buyer has alternatives to doing the deal, who can blame him for bailing out ?

Sellers and their business brokers would do well to understand the operation of the contract, especially the landlord approval mechanism and relevant time limits before exchange. That way, they can tighten the reigns and line up a second chance.

Experience v. skills

15 January 2024

In NSW, one of the bars sellers have to clear is to get the landlord to agree the buyer has not-inferior retailing skills.

Often confused, “retailing skills” and “experience” are not the same.

Does the seller’s 20 years of “experience” require the buyer to demonstrate 20 years and 1 day of experience to clear the hurdle ? What if the seller had gone bankrupt twice in that time and broken the lease on all of his shops ?

What if the best the seller ever did was break-even or be a silent partner sitting on his hands while others did the retailing ? What if the buyer has won retailer-of-the-year four times in his short 5 years and in that time established a multi-site operation, how does that stack up against 20 years of misery?

Set up the basis of comparison before inviting the comparison. Quantity (years of experience) is easy to measure, but is no guarantee of quality retailing skills. Plenty of businesses just plod along for years. Does the landlord need another plodder ?

Just because the seller is the sitting tenant does not mean his is the ultimate retailer. Reset the bar and expectations. Is the seller in arrears, has he been a difficult tenant, has the business logged consistent sales growth ? Find out.

Establish what quality of retailing skills are actually being demonstrated before you make the comparison.

The polite battle for control

10 January 2024

Who applies for the landlord’s consent to transfer the lease ? The tenant and only the tenant.

Why ? It is the tenant’s lease. It is the tenant’s business. It is the tenant’s sale.

The tenant (or his team) controls everything from the timing of the application to its content. The tenant must have a voice in every conversation, be present at every meeting and be party to every email.

Why ?

If the seller is not in control of the single most important part of the sale process, then who is ? Give the buyer unconditional access to the landlord and they have the keys to the sale. Broker not in control equals seller not in control, equals uncontrolled risk of landlord rejection –  not a conversation you want to be having.

Play the long game

5 January 2024

In the world of bricks and mortar business sales, the landlord is king.

Dealing with a seller’s lease requires landlord consent, so it helps business brokers to obtain that consent as early as possible, especially as getting paid depends on it. The less time sunk into a dud deal the better.

But how do brokers know the landlord will play by the rules or be open to reasonable efforts of persuasion ? A broker may sink hundreds of man hours into a deal only to be undone by a managing agent who applies the rules differently.

Landlord inertia is real. A landlord gains nothing from consenting to a lease transfer. Knowing this, brokers have a tendency to put potential buyers in front of the landlord too early, trying to overcome what they see as the biggest hurdle first.

Are they playing the game wrong ? Maybe. Here’s a couple of reasons why. Buyers are not buyers until they have exchanged contracts. Until then they are essentially tyre-kickers. Getting parties invested in the process is part of the process. After an exchange of contracts, things take a different colour. Everyone is pulling in the same direction. Instead of let’s-wait-and-see, both buyer and seller are motivated to get landlord’s consent as soon as possible.

All sales and landlords are different. However, brokers can do more to loosen the earth. It only takes a subtle, yet powerful shift to help everyone get on board.

Apply to apply. The paperwork should be the last step of a larger conversation around landlord consent. Think of it as the pre-application. Instead of filling in a bunch of forms and tacking on some untested financials, start by sparking a conversation about the business, the sale, the buyer, the centre, the manager and the reality as the landlord sees it. The feeling of participation in this process is powerful and not to be dismissed.

Centre managers like all managing agents are gatekeepers. They are primed to protect the landlord’s asset, value creation is not part of their job description. Saying no comes easy to them. So keep the powder dry and get used to having better conversations.

On the big deals, play the long game.