Lease Novation: How To Transfer A Commercial Lease In Australia

If you’re buying a business, selling a business, or restructuring your operations, the commercial lease is often the deal-breaker (or the deal-maker).

Maybe you’ve found the perfect premises and the existing tenant wants out. Or you’re selling your business and the buyer wants to keep trading from the same shopfront without negotiating a fresh lease from scratch. In many of these situations, you’ll hear people talk about a lease “novation” (or a lease transfer/assignment) as the way to move the lease across.

This kind of transfer can be a practical way to keep the existing lease on foot - but it’s not just “changing the name on the paperwork”. It can affect who is responsible for rent, repairs, make-good obligations, guarantees, and what happens if something goes wrong later.

Below, we’ll walk you through how a lease novation or transfer is commonly handled in Australia, when it’s used, what to watch out for, and how to protect your small business before you sign.

What Is A Novation Of Lease (And Why Does It Matter)?

A novation of lease is a legal process where the parties agree to swap an existing tenant for a new tenant, with the landlord’s consent. In effect, the new tenant takes over the lease obligations from the transfer date under the terms set out in the transfer documents.

In plain English, “novation” is often used to describe a lease transfer where:

• the existing tenant is replaced by a new tenant; and
• the lease continues on largely the same terms (unless varied); and
• the parties sign a legal document (often called a deed of novation or a transfer/assignment deed) to make it binding.

This matters because the lease is often one of the most valuable (and risky) contracts your business will have. Your lease can lock you into long-term costs, limit what you can do in the premises, and create obligations that can continue even after you stop trading there.

If you’re taking over an existing lease, you’re also taking on ongoing obligations - so you’ll want to understand exactly what you’re inheriting, and what (if anything) the outgoing tenant remains responsible for.

Novation vs Assignment: What’s The Difference?

Small business owners commonly mix up novation and assignment. They can look similar on the surface (both involve a new party taking over), but they are legally different - and the difference can affect who remains liable.

• Assignment of lease: the tenant transfers their interest to a new tenant, but the original lease remains on foot. Depending on the wording of the lease and the assignment documents, the outgoing tenant (and any guarantors) may remain liable for some obligations, or may be released.
• Novation of lease: the parties agree to replace the outgoing tenant with the incoming tenant under a new agreement/document. Whether the outgoing tenant (and guarantors) are released depends on the deed terms and the underlying lease requirements.

In practice, landlords and agents may use different labels (or combine concepts) in their documentation, and “novation” isn’t always the term used for lease transfers. What matters most is what the documents actually say about liability, release, and ongoing obligations.

When Would A Small Business Use A Novation Of Lease?

Lease transfers (sometimes described as a novation) often come up during major business transitions - especially where the premises are key to the business’s success.

Common scenarios include:

• Buying a business where you want to keep operating from the same premises without negotiating a brand-new lease.
• Selling your business where the buyer needs certainty that they can take over the shop, warehouse, or office.
• Internal restructuring, such as moving a lease from a sole trader to a company (or between related entities), where you want the lease tenant to match your trading entity.
• Bringing in a new operator, for example if you’re exiting the business but the premises and lease terms are still valuable.

If you’re buying or selling a business, the lease transfer is usually dealt with alongside the broader sale documentation. In these deals, it’s common to have settlement conditions tied to landlord approval of the lease transfer.

That’s also why your lease strategy and your business sale strategy often need to be aligned from day one - especially if your sale involves goodwill, fit-out, or brand value connected to the location.

How Does Novation Of Lease Work In Practice?

While the details vary between leases and landlords, most lease transfers follow a similar path. The key point is that a lease can’t usually be transferred (whether by assignment/transfer or a novation-style deed) without the landlord’s written consent.

Step 1: Check The Lease For Transfer Rules

Your lease usually has a clause about transferring the lease, assigning it, subletting, or dealing with the landlord’s consent. This clause will often cover:

• what approvals are required;
• what information the landlord can request about the incoming tenant;
• timeframes and formalities;
• whether the landlord can charge legal costs; and
• whether the outgoing tenant (and any guarantors) are released or remain liable.

Before you commit to buying a business or signing a heads of agreement, it’s worth getting the lease reviewed so you know what’s realistically possible.

Step 2: Landlord Due Diligence On The New Tenant

Landlords will usually want comfort that the incoming tenant can pay rent and comply with the lease. Depending on the premises and lease terms, the landlord may ask for:

• financial statements, bank statements, or evidence of funding;
• a business plan or trading history;
• personal references or rental history;
• directors’ guarantees (if the incoming tenant is a company); and/or
• security like a bond or bank guarantee.

If you’re the incoming tenant, you should factor this into your timeline. If you’re the outgoing tenant (or seller), you’ll want to manage expectations with the buyer about landlord approval timelines.

Step 3: Negotiate Any Changes (If Needed)

Even though lease transfers often keep the lease terms the same, landlords may try to use the transfer as a chance to renegotiate. You might see requests like:

• increasing the security deposit or bank guarantee;
• updating the “permitted use” clause;
• changing repair obligations;
• adding (or expanding) personal guarantees;
• bringing forward a rent review; or
• updating special conditions.

Sometimes these changes are reasonable. Sometimes they materially increase your risk. Either way, you’ll want to understand what you’re agreeing to before you treat the lease transfer as a simple admin task.

Step 4: Sign The Transfer Document (Often A Deed)

The legal instrument is often documented in a deed (for example, a transfer/assignment deed, and sometimes described as a deed of novation). It’s the document that:

• records the landlord’s consent;
• sets out the transfer date (often tied to settlement);
• confirms whether the outgoing tenant (and any guarantors) are released or remain liable; and
• confirms the incoming tenant’s obligations going forward.

In many transactions, the lease transfer paperwork is coordinated with other documents - for example, the buyer and seller’s obligations under the sale agreement and settlement checklist.

If the lease needs to be transferred as part of a broader transaction, it can help to keep your legal documents aligned, including your broader business sale paperwork and completion process.

Key Risks And Deal Issues To Watch In A Novation Of Lease

Lease transfers can be useful, but they’re also where small businesses can be caught off guard - especially if you’re focused on the operational side of the purchase or sale.

Here are the big issues we recommend checking carefully.

1. Are You Taking On Hidden Breaches Or Existing Problems?

If you’re the incoming tenant, you may be inheriting a lease where the outgoing tenant has already breached obligations (for example, unapproved alterations, unauthorised subletting, or unpaid outgoings).

Depending on how the lease and transfer documents are drafted, you may become responsible for fixing or paying for some issues after the transfer date - even if you didn’t cause them.

Practical steps that help:

• request a written statement of account (rent and outgoings paid up to date);
• ask the landlord to confirm there are no existing notices of breach; and
• inspect the premises and check what the lease says about repairs and condition.

2. Make-Good And End-Of-Lease Obligations

Make-good clauses are one of the most misunderstood parts of commercial leasing. They often require the tenant to return the premises to a particular condition at the end of the lease (for example, removing fit-out, repainting, reinstating walls, or restoring services).

In a lease transfer, it’s important to understand:

• what condition the premises is currently in;
• what the lease says you must do at the end; and
• whether any existing fit-out approvals exist (and who owns the fit-out).

If you’re selling a business, you’ll also want clarity on whether you’re required to “make good” when you exit, or whether the incoming tenant’s takeover changes how (and by who) those obligations will be dealt with under the documents.

3. Personal Guarantees (And Whether You Can Ever Get Released)

If the incoming tenant is a company, landlords commonly require a director’s personal guarantee. That means you could be personally responsible for rent and losses if the business fails to meet its lease obligations.

If you’re the outgoing tenant, check whether any existing guarantees (for example, your personal guarantee) are being released as part of the transfer. Don’t assume they disappear just because a new tenant takes over.

This is a common “gotcha” for small business owners exiting a lease: you might stop trading, but still be on the hook if your release isn’t properly documented.

4. Who Pays The Landlord’s Legal Costs?

Many leases allow landlords to recover “reasonable legal costs” associated with consent to a transfer. This can include the landlord’s lawyer drafting the deed and reviewing the incoming tenant’s documents.

In practice, it’s often negotiable who pays - the outgoing tenant, the incoming tenant, or split between them. But you should budget for it and document it clearly in your broader transaction documents.

5. Timing: What Happens If Consent Takes Too Long?

Timing is a major commercial risk. If you’re buying a business and you can’t take over the lease on time, you might not be able to operate from the premises - which can affect revenue immediately.

If you’re selling, delays can push settlement out, or even cause the deal to fall over.

Where possible, you’ll want:

• clear timeframes for landlord consent;
• conditions precedent in the sale documents tied to lease transfer approval; and
• a plan for what happens if approval is refused (or granted on unacceptable terms).

What Legal Documents Should You Prepare When Transferring A Commercial Lease?

A lease transfer is rarely just one document. It’s usually part of a bundle of contracts and approvals that work together.

Depending on whether you’re the buyer, seller, outgoing tenant, or incoming tenant, these are some common documents to consider.

• Deed of novation or transfer/assignment deed: the core document that records the landlord’s consent, swaps the tenant, and sets out release and liability terms.
• Business sale agreement: if the lease transfer is connected to a sale of business, the agreement should deal with the lease as a key condition and allocate costs and responsibilities. (This is often handled alongside an asset sale agreement style structure, depending on the transaction.)
• Completion checklist: to ensure settlement tasks are clearly tracked and nothing is missed on the transfer date (a completion checklist can help keep timing and deliverables aligned).
• Authority documents and sign-offs: if someone is signing on behalf of another person or entity, you may need an authority to act in place to avoid execution issues.
• Company approvals and governance documents: if the incoming tenant is a company (or you’re restructuring into a company), it’s worth ensuring your internal documents like a Company Constitution (and signing requirements) are consistent with who can enter into leases.
• Privacy and data handling documents (where relevant): if your business sale includes customer databases, mailing lists, or online accounts, privacy compliance may come into play and you may need a Privacy Policy that reflects how your business collects and uses personal information.

Not every transaction needs every document, but the main idea is this: when you transfer a lease, you’re also transferring risk. Good documentation makes sure that risk is allocated clearly (and fairly) between everyone involved.

Key Takeaways

• A novation of lease (or lease transfer) is a process where an existing commercial lease is moved to a new tenant with the landlord’s consent, and the incoming tenant takes on obligations going forward under the transfer documents.
• Novation is different from assignment, and the difference can affect whether the outgoing tenant (and guarantors) are released or stay liable.
• Before you sign, check the lease transfer clause, get clarity on rent/outgoings status, and confirm whether there are any existing breaches or make-good risks.
• Be careful with guarantees, security, and any “extra” terms the landlord tries to add during the transfer process.
• Lease transfer timing can affect business sale settlements, so it’s important to align the transfer documents with your broader transaction documents and deadlines.

This article is general information only and isn’t legal advice. If you’d like advice on your specific situation, it’s best to speak with a lawyer.

If you’d like help with a lease transfer (including a novation-style arrangement) or transferring a commercial lease as part of buying or selling a business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.