Due diligence, assignment clauses – consent ‘not to be unreasonably withheld or delayed’

Assignment clauses are sometimes an overlooked inclusion in the ‘boilerplate’ of a contract.

More recent experience suggests that they are increasingly becoming heavily negotiated, particularly for land access / assembly and native title agreements for wind, solar, infrastructure, mining, oil and gas projects.

A recent Supreme Court decision in New South Wales provides timely guidance on how a Court will approach whether a person has unreasonably withheld consent to assignment and how long proceedings might take should a worst-case scenario arise.

See: In the matter of Sun Cable Pty Ltd (Administrators Appointed) [2023] NSWSC 1037.

Background and the assignment clause in question

In this case, the settlement of the sale of a large-scale renewables project was subject to a condition precedent that required the assignment and novation of certain option deeds (Option Deeds) by a specified end date.

In broad terms, the Options Deeds gave the vendor (Assignor) an option to obtain a sub-lease and related easements over pastoral property in the Northern Territory for the development of the renewables project.

The use of an Option Deed format is a common arrangement applied by negotiating parties to facilitate land assembly for a project as it permits a proponent to secure the land whilst the feasibility of the project is assessed.

The relevant part of the assignment clause in the Option Deeds provided that (we have added the underlining):

(a)   subject to clause 13.1(d), the Grantee may not assign its rights under or novate its obligations under this Deed unless:

(i)       at least ten business days before the proposed assignment, it has given the Grantor all information requested by the Grantor which is reasonably required by the Grantor to determine whether a proposed assignee (or the party in control of the proposed assignee) is able to satisfy the Grantee’s obligations under this Deed; and

(ii)      the Grantor approves the assignee in writing (which approval must not be unreasonably withheld or delayed).

Consent to assignment was not provided and proceedings were subsequently brought in the Supreme Court of New South Wales for declaratory relief and specific performance (which was granted by the Court).

The law on consent to assignment

The judgment helpfully summarises the law at paragraph [145] in the following terms:

145. The applicable principles may be summarised as follows:

(1)        the matters that the court should take into account in determining whether consent or approval for the proposed assignment and novation has been delayed or withheld unreasonably depend on the terms of the relevant contract – in this case, the Option Deeds;

(2)        the question of whether a party has acted reasonably in delaying or withholding consent is a question of fact and, in the context, “reasonable” should be given a broad and common sense meaning;

(3)        consent is withheld or delayed unreasonably if it is withheld or delayed on grounds that has nothing to do with the relationship of the contracting parties in regard to the subject matter of the contract, or if it is withheld or delayed in order to achieve an objective which is a “collateral advantage” outside the terms of the contract;

(4)        any unreasonably delay in responding to a request for consent may amount to a refusal to give consent without reasons and, whilst an obligor is not bound to give reasons, it may be more readily be inferred from the failure to give reasons that the refusal of consent was unreasonable; and

(5)        the question whether a refusal of consent was unreasonable is to be determined objectively having regard to all the circumstances of the case.

Was consent unreasonably withheld?

The landholders’ submission was that:

• in deciding whether to give consent it was entitled to take into account whether the proposed assignee has the willingness and financial capacity to develop, construct and operate a viable long term project on the land and whether the assignee was able to satisfy its obligations under the Option Deeds and under the 40 year sub-lease for which the option was given;
• it was entitled to be positively satisfied of those matters before providing consent to the assignee and that as the Assignor had not provided the information requested that evidenced those requirements it was not unreasonable to withhold consent; and
• it was entitled to be satisfied that its land will be not used or occupied by the assignee in a way that is undesirable such that there was a non-alignment of values with indigenous communities on the land and with environmental, social and corporate governance  principles.

The Court held that what the landholder could and could not consider was effectively governed by the Option Deeds. In this case, governed by the words “is able to satisfy the Grantee’s obligations under this Deed”.

The Court found that – at the time the Option Deeds were signed – the landholder was not in a position to assess whether or not the vendor proponent would ultimately have been likely to exercise the options and whether or not it would be likely to be able to comply with all of its obligations under the sub-lease and easements for the 40-year sub-lease if the option was exercised.

This was put in the following terms by the Judge:

In my opinion, the reasonable businessperson would not have read those words as extending to any obligations … under a potential Sub-Lease that has not been entered into as at the date of the proposed assignment, and that may never be entered into during the term of the Option Deed. To read the words in that way would strain the literal meaning and would also make commercial nonsense of clause 13.1(a) by obliging the … [provision of]… information of a kind which it would be unable to provide because the proposed assignee’s ability to satisfy any future obligations under the sub-lease would depend on the project being developed and successfully operated during the term of the potential sub-lease.

And further at paragraph [159]:

I reject …[the]… submission that “evident commercial purpose” of clause 13.1(a)(i) was “to allow [the landholder] to protect itself against the danger of an assignee who might not be able to perform the obligations under the Options Deeds, including under the 40 year sub-lease”. In so far as that submission concerns the sub-lease, the “danger” is inherent in the nature of the project and the uncertainties referred to above. The sub-lease Option Deed provided no protection for … [the landholder] … against a danger vis-à-vis the Grantee. Clause 13.1(a)(i) does not provide a mechanism for …[the landholder] … to protect itself against the same danger vis-à-vis a proposed assignee.

Comments

The increasing sensitivity with respect to assignments in land access and native title agreements is in part based on a concern that an incoming assignee may not be a suitable counter party. This presents a number of challenges as an overly restrictive assignment clause can narrow the class of potential assignees. Likewise, a suitability requirement – if included in an assignment clause – will vary in application, depending on the status of the project and the interest being acquired.

The decision therefore highlights the need for an assignment clause to be carefully prepared, particularly where consent to assignment is required.

Thoughts on drafting assignment clauses

1. Where the assignment is subject to a test or standard, it is important that it be an objective standard and not a subjective one.
2. Where the assignment clause requires the assignor to provide information to the continuing party, care needs to be taken to ensure that the required information is referable to the scope of the test or standard. A misalignment can widen the test or standard.
3. The scope of the test or standard needs to be very clear. In this case, the Judge read the test ‘is able to satisfy the Grantee’s obligations under this Deed’ to be the Option Deeds alone and not their attached or appended sub-lease and easement. This significantly narrowed the scope of the test or standard.
4. The landholder sought a stay of the matter until such time as the disputes clause had had the opportunity to run its course. While the Court was unwilling to grant a stay due to the urgent nature of the application, excluding the assignment clause from the disputes clause or making it clear that urgent applications can be excluded from the disputes clause will be a sensible drafting technique.

Speed of the proceedings

The matter was heard quickly by the Court. The Assignor filed the application for declaratory relief and an order for a specific performance on 23 August 2023. The Hearing was on 28 August 2023 and the reasons given on 30 August 2023.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).