Commercial Leases - Assignment and Subletting
A tenant who is looking to assign (i.e. transfer) its lease to someone else, or who is looking to sublet their property, will almost always need to first obtain the consent of their landlord. Depending on which route the tenant is looking to go down, there are certain things which need to be considered.
If a tenant wants to assign its lease, the lease needs to allow it. Often, the lease will allow assignment with consent of the landlord, and the law will imply that such consent cannot be unreasonably withheld or delayed. Where a tenant needs to obtain consent from the landlord, the lease will usually require that the tenant pays the landlord’s legal and surveyors’ costs in relation to the application for consent. The landlord may be entitled to refuse its consent where the proposed assignee is not of sufficient financial standing to be able to pay the lease. It is for this reason that a landlord will almost always wish to see references for the proposed assignee.
Even where the landlord’s consent cannot be unreasonably withheld or delayed, the lease may impose certain conditions with which the tenant must comply. This might include:
- a requirement for the tenant to enter into an Authorised Guarantee Agreement (AGA) under which the tenant must guarantee the payment of rent and compliance with lease obligations by person to whom the lease is being assigned;
- that the tenant is fully up to date with its rent and all other sums due under the lease;
- that the property in the state of condition and repair required by the lease;
- that the person to whom the tenant is assigning its lease provides a guarantee or a rent deposit.
A tenant who is required to enter into an AGA on assignment may not only have to guarantee the performance of the lease obligations by the incoming tenant, they may also be required to take back a lease of the property in the event that the incoming tenant becomes insolvent. Since the outgoing tenant cannot control what happens when they have assigned their lease, it is important for an outgoing tenant to carefully assess any buyer of their lease first in order to minimise problems. An outgoing tenant may therefore also wish to consider the references that the buyer offers up to the landlord or even the accounts of the incoming tenant.
An outgoing tenant’s liability under an AGA will end when the lease ends or when the person to whom they sold the lease sells the lease on again.
Tenants taking a new lease may want to consider this issue when negotiating their lease, and could look to alternative means of vacating the premises without having this liability having over them by, for example, including the ability to terminate the lease on notice at intervals during the lease (known as a “break clause”).
If you are nervous about assigning your lease because of the lack of control, you can instead ask the landlord whether you can sublet. Subletting would not release you from the lease obligations; would you remain primarily liable to the landlord for the rent and other obligations under the lease despite the fact that you are not in occupation. However you would have your own direct contractual relationship with your subtenant that you could enforce.
In order to be able to grant a sublease, you would probably have to obtain consent to the grant of sublease which the landlord would usually only issue via a formal deed.
The sublease will have to be very similar to the terms of your own lease. This is to ensure compliance with your own lease. By way of example, where your own leases requires you to keep the property in very good repair and condition, your landlord would not permit the sublease to allow the subtenant to have a lesser repairing obligation. This would inevitably lead to a breach of your own lease terms.
You would not be able to grant a lease for any longer period than that which you were granted under your own lease. You also would not be able to grant out any rights which have not been granted to you under your lease.
You will generally be entitled to agree your own rent with the subtenant, although your lease may say that you cannot grant a lease at a premium and at a low rent. This is because your own landlord will not want you to have a cash premium up front and then try to wash your hands of the property leaving a sub-tenant there who is paying a very low rent.
A landlord will usually require the sub-lease to be excluded from the provisions of the Landlord & Tenant Act 1954. This means that the sub-tenant will not have the right to renew his sub-lease at the end of the term.
If you are looking to assign or sublet your premises, or your tenant is looking to do so, please do not hesitate to contact us.