Understanding ‘no release’ clauses in retail lease assignment deeds

When a retail business is sold, it often involves the transfer (‘assignment’) of the retail lease to the new business owner. In addition to a sale of business contract, a Deed of Assignment is commonly used to legally transfer the lease interest from the outgoing tenant (Assignor) to the incoming tenant or buyer (Assignee).

Many small business owners are unclear about the implications of ‘no release’ clauses in Deeds of Assignment for retail lease transfers. A common misconception is that once a lease is assigned, the outgoing tenant (Assignor) is no longer liable, but this is not always the case.

‘No release’ clauses in these Deeds of Assignment can create ongoing liability risks for Assignors and their Guarantors, even after they have exited the business.

What is a ‘no release’ clause?

A ‘no release’ clause in a Deed of Assignment states that the Assignor remains responsible for the lease obligations even after assigning the lease to the new tenant.

For example, a clause may state: "The Assignor acknowledges and agrees that nothing in this Deed shall constitute a release or discharge of any of the obligations of the Assignor and the Assignor’s Guarantor to the Lessor in respect of the Lease after the date hereof."

This means that if the new tenant (Assignee) defaults, the outgoing tenant (Assignor) and their Guarantor can still be held responsible for unpaid rent, outgoings and lease breaches even though they no longer own or operate the business.

Protecting Assignors from ongoing liability

Release clauses that reference the Retail Leases Act 1994 (NSW) or section 41A can cause confusion for parties. While some landlords include these clauses to protect their financial interests, they may not be enforceable under NSW retailing leasing law.

Under Section 41A of the Retail Leases Act 1994, if the following conditions are met, any ‘no release’ clause in a Deed of Assignment becomes invalid and the Assignor is fully released from future liabilities:

When a Lessor (landlord) agrees to assign a lease to an incoming tenant and
A completed Assignor’s Disclosure Statement is given to both the Lessor and Assignee seven days before the assignment takes place.

However, if a valid disclosure statement is not provided, the ‘no release’ clause may remain enforceable, and the Assignor (and their Guarantor) may still be liable.

Implications for Guarantors

Guarantors (e.g. directors who guaranteed the lease) play an important role in lease agreements, often personally guaranteeing the tenant’s obligations. If a ‘no release’ clause applies, the Guarantor remains responsible for lease liabilities, even if the original business has been sold or moved.

However, under Section 41A, if the Assignor is released from liability, the Guarantor is also released.

What should small businesses do?

If you are selling a business, it’s important to understand the implications of lease assignment and ‘no release’ clauses. Failing to comply with Section 41A could result in unexpected financial liability, even after you’ve handed over the business.

You should consider getting independent advice to assign your lease correctly and protect yourself from ongoing liability. This process involves:

Confirming the business sale includes a lease assignment to ensure the continued use of the premises for an ongoing business.
Requesting an updated Lessor’s Disclosure Statement at lease 14 days before the lease assignment.
Providing the required disclosure documents to the Assignee: a copy of the Assignor’s Disclosure Statement, Parts A and B signed by you (the outgoing tenant) and the Assignee.

Further information:

If you need help understanding your lease assignment rights, contact the NSW Small Business Commission for free guidance and dispute resolution services.