What is assignment of a lease?
A significant number of commercial leases, whether for retail shops, offices, warehouses or industrial units, are let on long leases, often with a 10 year term or more.
As circumstances change, tenants often decide they would like to exit the lease part way through the term. A common potential solution to this issue is to find a replacement tenant to transfer the remaining term of the lease to. In legal terms this is known as assignment.
The basic process to transfer a lease
The key steps and main issues that arise with a lease assignment are :-
- Current tenant finds an Assignee – current tenant finds a suitable new tenant for the commercial property. In some cases, the proposed replacement tenant may agree to pay a premium for the assignment, but this is now quite rare unless a business (e.g. restaurant) is trading. Sometimes, a current tenant may need to consider some kind of financial inducement for the new tenant, such as a reverse premium payment – but some leases ban this .
- Landlord’s Consent sought – In general contract law, unless assignment of a contract is expressly prohibited or limited, assignment can take place without the other party’s consent. With commercial property leases, the vast majority do contain a restriction on assignment. This is generally on the basis that assignment is only permitted with the Landlord’s consent given formally, with such consent not to be unreasonably withheld. If the Landlord agrees, a Licence to Assign is drafted by lawyers. Landlords may require assignees to give a rent deposit which is held until the end of lease or until the assignee in turn assigns with Landlord’s consent.
- Lease Assignment Agreement – a formal agreement is drawn up outlining the transfer of rights and obligations between the assignor, assignee,. The assignee assumes all the responsibilities of the original lease and would give the assignor an indemnity against future breaches. However, the assignor’s release from obligations depends on the agreement with the landlord.
- Authorised Guarantee Agreement – In most cases, the assignor will be required to act as guarantor for the assignee under an Authorised Guarantee Agreement and will remain liable under the lease if the assignee breaches its obligations under the Lease.
- Completion – once the landlord’s licence to assign has been granted and the lease assignment documents have been signed by all required parties, the assignment is complete. The assignee becomes the new tenant, responsible for upholding the lease terms (paying rent, maintenance etc.).
Risk areas for assignees
Particular areas of concern are likely to be :-
- potential liability for dilapidations at the end of the term,
- the position on ability to renew the lease
- the general condition of the building and any alterations made to the premises by the existing tenant (known as the assignor) looking to assign.
- the position on future rent review.
Consequently, in addition to the usual types of checks, searches and enquiries which a solicitor for a tenant will make, there may be additional negotiations whereby the assignee will seek assurances and protections from the assignor.
Risk areas for assignors
The main area of concern is the liability of the assignor for its assignee under the AGA if the assignee goes into breach of lease.
Alternatives to lease transfer for current tenant
Lease assignment is not necessarily the only option available to a tenant looking to exit from a lease of commercial property. Other possibilities to look at commonly include :
- Break – Many long leases have break clauses – if there is a possibility of exercising the break clause in the near future, this may be worth looking at as a clean exit.
- Subletting – most leases will allow subletting, with the Landlord’s consent -such consent not to be unreasonably withheld. If the Landlord agrees to a subletting, a Licence to sublet will be granted and an underlease granted by current tenant to its sub- tenant which should be on the same terms as the lease. The sub-tenant will be in occupation and responsible for upholding the underlease terms (paying rent to the tenant, maintenance etc.) The tenant will still be liable to the Landlord under its lease.
- Surrender – If the current tenant is in financial difficulties it may be possible to negotiate a surrender of the lease with the landlord on the basis that the landlord may accept that he/she/it may get no further payments if the tenant is insolvent. If the current tenant has paid a rent deposit the landlord may well insist on keeping this as compensation. A surrender may also be possible if a prospective new tenant is not prepared to take an assignment and is insisting on the grant of a new long lease instead.
Contact Us
If you need a solicitor for advice on or to deal with taking or assigning a lease, we are an ideal choice, especially if you are in London. We advise landlords and tenants and clients interested in taking on or disposing of an existing lease or business. Please do get in contact to discuss or to get a quote.
