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It is very common for tenants of commercial leases to either want to, or perhaps need to, ‘get out’ of the lease. A common way of doing this is to ‘assign’ the lease to a new tenant (this may be the only option if there are no break options in the lease and the Landlord is unwilling to agree to a surrender). Kirsty Jackson, Head of our Commercial Property team, takes a look at whether a landlord has to consent when a tenant wishes to assign and what conditions they may be able to impose, but first, what does assigning a lease mean?
To assign a lease is to transfer the legal interest to another. Meaning the incoming tenant will step into the shoes of the outgoing tenant and take on the obligations under the lease. It is important to note here that assigning a lease is different to subleasing the property (where a new, shorter lease is ‘carved out’ of the existing lease) and although the points below apply equally to subletting, we are focusing on assignments.
If the lease is silent on assignments, the tenant is free to assign without the landlord’s consent.
If the relevant clause preventing assignments is qualified (so that the tenant can assign but only with the landlord’s consent) the landlord will be under an implied duty not to unreasonably withhold it’s consent (section 19(2) of the Landlord and Tenant Act 1927).
Landlord’s should be aware that the Landlord and Tenant Act 1988 imposes the following duties;
Equally, the tenant should be aware that the above duties only arise when a written application for consent is served by the tenant on the landlord (or other relevant person). Failure to serve the written application for consent means that the landlord does not have a duty to respond within a reasonable time, so tenants need to be careful when applying for consent.
The court have previously expressed the view that a reasonable time would be weeks rather than months. Generally, the time will start when the landlord has been provided with all the necessary information required to make the decision.
Ideally for a landlord, the lease will contain a provision that the landlord’s consent can be subject to the outgoing tenant entering into an Authorised Guarantee Agreement (AGA). An AGA is an agreement whereby the outgoing tenant will guarantee the performance by the incoming tenant of the obligations under the lease. If the incoming tenant fails to perform its obligations (including paying rent and repairing the property), the landlord can pursue the outgoing tenant. If this is the case, which it commonly is, the outgoing tenant will not be getting a ‘clean break’ as they would be if the lease was surrendered or terminated. It is therefore important that the outgoing tenant is comfortable with the incoming tenant’s ability to comply with the tenant covenants in the lease as, if they do not comply, it will impact on them and not just the landlord.
The provisions relating to AGAs are an important consideration for landlords as, if the lease is a new lease for the purposes of the Landlord and Tenant (Covenants) Act 1995 (a tenancy granted on or after 1 January 1996), the outgoing tenant would not remain liable throughout the term unless it has entered into an AGA.
The assignment provision in the lease may also provide that the landlord can refuse consent in certain circumstances, such as, if, in the landlord's reasonable opinion, the incoming tenant is not of sufficient financial standing to enable it to comply with the tenant's covenants and conditions contained in this lease. It is important for both parties to check the terms of the lease carefully.
Often the lease will state that the consent must be given by Deed and a formal Licence to
Assign will need to be entered into. Landlords need to be careful to avoid granting consent in correspondence before completing the formal Licence to Assign. The landlord should make it clear in its initial response that the landlord’s consent will not be given unless and until it is embodied in an executed and completed Licence to Assign.
Both the incoming and outgoing tenant should bear in mind that the landlord will likely incur legal fees when an application is made for consent to assign. Landlord’s will not want to pay for solicitors fees each time a tenant wishes to assign, meaning the outgoing and incoming tenant will need to come to an agreement as to who will be responsible for these.