Control clauses in leases

Posted on Jan 31, 2018 by Terry Morgan   |   Categories: Commercial & Business Law

“Control” clauses in leases are those clauses which provide that where the lessee is a corporate entity and the control of that corporate entity changes as a result of transfer or sale of shares in the corporate entity then such change is deemed to be an “assignment” of the lease and therefore the corporate entity must obtain the lessor’s consent to such “change of control”.

Usually a commercial lease will contain a clause to the effect that if such “change in control”(being a deemed assignment of the lease) is effected in the absence of the landlord’s consent then such “change in control” is a breach of an essential term of the lease, therefore enabling the lessor to terminate the lease.

In a recent Supreme Court of New South Wales decision, a lessor, purported to terminate the lease relying upon a search conducted through ASIC which disclosed that a change of control had taken place in the corporate entity that was the lessee, in the sense that the ASIC search revealed that a change of shareholding had taken place so as to reach the “change of control” clause in lease.

In subsequent proceedings before the Supreme Court of New South Wales involving the “change in control” and other issues, the court held that the documents lodged with ASIC were lodged in error and that there had not been any effective transfer of shares in the corporate entity which was the lessee so as to trigger the “change in control” provisions of the lease.

Therefore, there was no deemed assignment of the lease.

Accordingly, the lessors purported termination of the lease, relying on the “deemed assignment” of the lease arising out of the “change in control” was invalid.

In such circumstances, even when ASIC records disclose a change of shareholding in a corporate entity that is a lessee such as would trigger the “change in control” provisions of a lease and therefore create a “deemed assignment”, it appears that the lessor would be wise to make enquiry of the lessee as to the circumstances surrounding the change of ownership and whether there is an explanation for such “change in control” prior to giving consideration to any termination of lease arising out of the breach of an essential term of the lease being the “deemed assignment” arising out of the “change in control” of the corporate entity that is the lessee.