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Tenants of commercial properties may either want or need to divest themselves of their lease.
Those reasons can be varied but often related to changing market conditions and pressures.
Typically, if there is no break provision contained within the lease or the landlord is unwilling to agree to surrender the lease, the only option a tenant has is to assign the lease to another entity.
Assignment of the lease is where there is a transfer of the legal interest to that new entity.
The new tenant will step into the shoes of the old tenant, taking on the obligations and liabilities under the lease.
How can a tenant assign the lease? Does a tenant need the landlord’s consent?
If there is no provision on assignment in the lease, then the tenant is free to assign the lease without consent from the landlord.
However, in many cases, the lease will stipulate that the tenant must obtain the landlord’s consent to an assignment.
That consent must be given by Deed, and a formal licence to assign would need to be entered into.
A word of warning - landlords must be careful about granting consent to assign in correspondence between the parties before the licence to assign has been completed.
It is, therefore, advisable that the landlord makes it clear in its initial correspondence that no consent is given unless a completed licence to assign has been entered into.
If it does not make this clear, it is open to the tenant to make arguments that the landlord is deemed to have consented to the proposed assignment.
Where the landlord’s consent is required, section 19(1) of the Landlord and Tenant Act 1927 provides that the landlord is under a duty to not unreasonably without consent.
Section 1 of the Landlord and Tenant Act 1988 (LTA 1988) also imposes further duties on the landlord, which are set out below. However, tenants must be aware that the following duties only arise when a written application is served.
If a written application is not served upon the landlord or the appropriate person, then the duties do not apply.
The duties are as follows:
- To give consent (except where it is reasonable not to do so) within a reasonable time.
- To give written notice of the decision; and
- To pass on applications for consent to the appropriate person.
Reasonable time is deemed to be several weeks rather than months, and the time will generally start when the landlord has been provided with all the relevant information to make their decision.
What about conditions for consent?
Section 19(1A) of the LTA 1927 also gives the landlord and the tenant the remit to set out in the lease the circumstances where a landlord may withhold consent and where (if consent is granted) that consent is conditional.
If the landlord ultimately refuses consent on account of those conditions, then that refusal will not be deemed to be unreasonable.
An example of a condition of consent is the requirement for the new tenant must enter into an authorised guarantee agreement (AGA).
An AGA is an agreement where the old tenant will guarantee the performance of the new tenant of the obligations under the lease.
For example, if the new tenant fails to pay the rent or perform any of the other obligations under the lease, the landlord can pursue the old tenant.
It is, therefore, important for the old tenant to be satisfied that the new tenant will be able to comply with the obligations in the lease, as it could also affect them.
Circumstances where the landlord and tenant agree that consent can be reasonably withheld, include where (in the reasonable opinion of the landlord) the new tenant is not of sufficient financial standing, if there are arrears of rent or other money due under the lease, or if there is a material breach of the covenant by the tenant that has not been remedied.