Contracts are at the heart of any business. Transferring to the purchaser the benefit of the contracts under which the business operates is a fundamental part of a sale of business. These contracts include:

• contracts with suppliers;

• contracts with customers; and

• leases of business premises.

On a sale of business, the benefits of contracts are passed on to the purchaser by:

• assignment;

• novation; or

• sale of shares in the contracting company.

If the other party to the contract agrees, there is no problem in assigning the contract to the purchaser.

In many cases, it is not practical to obtain the consent of the other parties to the assignment of each contract to which the business owner is a party for the following reasons:

• there maybe thousands of contracts, especially customer contracts;

• it may take too long to obtain the formal consent of each relevant party; or

• the other party to the contract may not agree.

However, some contracts can be assigned without the other party’s consent:

• contracts which are not for personal services may be assigned without the consent of the other party, and

• a contract may have specific terms, allowing assignment.

Novation occurs pursuant to an agreement between the vendor, the purchaser and the other party to the contract, whereby the old contract is replaced by a new one. The advantages of novation are:

• from the vendor’s point of view, there is no liability for anything arising after settlement, under the new contract; and

• from the purchaser’s point of view, there is no liability for anything that occurred under the old contract, before settlement.

Generally, a contract with a company will remain on foot, and will automatically come under the control of the purchaser of the shares in the company. However, the following issues may arise:

Some contracts state that a transfer of the control of a company will be deemed to be an assignment of the contract. This is usually in contracts which state that the contract cannot be assigned without the other party’s consent.

Many contracts between suppliers and companies are personally guaranteed by directors, who are usually also the shareholders. In that case, the vendor shareholders will wish to avoid being called on later to make payment under the guarantees. This raises the following issues:

• A supplier may agree to release vendor guarantees if the purchaser provides a substitute guarantee.

• The contract for sale of business should provide that the purchaser shall indemnify the vendor’s guarantors for liabilities arising after settlement, until those guarantors are released.

• It is often difficult for directors of a company to know what guarantees they have signed over the years. A purchaser is unlikely to give a blanket indemnity for any guarantee which is not specifically nominated. The only solution may be for the vendor’s directors to carry out the detailed searches of their records.

See Contracts.

A sale of business often includes a transfer of the lease of the business premises. All of the considerations set out above in relation to the transfer of contracts apply to transfer of leases. However, some additional factors need to be considered.

Almost all leases contain provisions covering transfers of the lease by the lessee. They usually state that the lessor’s consent is required, and often state that such consent shall not be unreasonably withheld.

In New South Wales, Victoria, Queensland and Western Australia, provisions to this effect are included in leases by statute, and in New South Wales and Queensland, the statutory provisions override any express provisions to the contrary.

In Tasmania, there is no statutory provision to this effect, except for retail leases.

In South Australia, a lessee can only seek to apply to the court for relief against forfeiture, where the lessor vexatiously or capriciously withholds its consent to a transfer: s 12(4), Landlord and Tenant Act 1936 (SA).

All states and territories have provisions facilitating the lessee’s right to assign a shop lease. In all states but Queensland, a lessor must consent to an assignment, except on very limited grounds set out in the relevant statutes.

Queensland gives no help to a lessee wishing to transfer a lease, other than invoking a dispute resolution procedure if the lessor refuses to consent.

At common law, the assignor of a lease remains liable, even for liability arising after assignment. The solutions are:

• seek an indemnity from the purchaser;

• seek a release from the lessor; and

• negotiate to terminate the existing lease, and replace it with a new lease.

On a sale of business, the transfer of a lease does not automatically release the guarantors, or effect a refund of the bank guarantees or bond provided by the original lessee. This must be negotiated with the lessor, who has no legal obligation to agree.

All states and territories but Tasmania have provisions to the effect that assignment of a retail lease will release the assignor and the vendor’s guarantors.

See Commercial leases.