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Assignment of a commercial lease is an attractive option for tenants of commercial properties who wish to divest themselves of their lease.
Commercial property tenants often find themselves trapped in a lease with time left to run, where the landlord does not consent to surrender, and the lease itself does not facilitate a break option.
Various reasons exist that may contribute towards the tenant wishing to divest themselves of their lease, such as business expansion or reduction, the property being no longer suited to business needs, or an agreement that the lease will be assigned to the purchaser upon the sale of a business.
Assignment of the lease facilitates the ability to transfer the lease from the current tenant (the 'assignor') to a new tenant (the 'assignee'); the result being that a new entity steps into the shoes of the assignor along with taking on the obligations and liabilities under the lease.
How to assign a lease?
Where the provisions of the lease are silent as to assignment, then the tenant is ultimately free to assign the lease without obtaining the landlord's consent.
However, modern commercial leases usually stipulate that the tenant must obtain the landlord's consent before they can assign the lease to another entity.
It is also unlikely that the lease will allow for the assignment of part only.
Why do I need the landlord's permission to assign a lease?
Primarily, landlords seek to ensure that the income they receive from rented properties is guaranteed to protect the value of their investment.
Landlords wish to have commercial tenants who are able to pay the rent in full on the specified dates due and are able to keep the property in good condition and state of repair.
Accordingly, landlords often seek to control who the lease can be assigned to by stipulating that their prior consent must be obtained before assigning the lease.
Can the landlord refuse to consent to an assignment of the lease?
Section 19(1A) of the Landlord and Tenant Act 1927 allows parties to outline in the lease certain circumstances in which consent to assign can be withheld by the landlord and any conditions to be satisfied for consent to be given.
Therefore, the tenant should consider the relevant alienation clause within the lease to determine any listed circumstances or conditions subject to which consent may be provided.
Common circumstances in which landlords argue that refusal is reasonable include the following:
- Non-payment of rent;
- Breach of the tenant's covenants;
- The proposed assignee is unable to comply with the covenants in the lease;
- The proposed assignee does not provide a guarantor or other security;
- The proposed assignee's proposed use is inconsistent with the property;
- The proposed assignee does not have sufficient financial strength;
- The proposed assignee is a group company;
Common conditions which a landlord may impose before the lease can be assigned include the following:
- The requirement that the outgoing tenant provides an AGA (authorised guarantee agreement);
- Provision of a solicitor's undertaking for the legal and professional costs incurred by the landlord relating to the assignment;
- The requirement is that all sums due are paid on the grant of the consent to assign and on completion of the lease assignment.
Unreasonable or reasonable refusal?
There are several reasons why a landlord may wish to withhold consent to assign; however, section 19(1) of the Landlord and Tenant Act 1927 (LTA 1927) outlines that the landlord is under a duty to not unreasonably withhold consent to assign.
Further, where a written application to assign is served upon the landlord, the landlord shall:
- Provide consent within a reasonable amount of time, unless it is reasonable not to do so;
- Provide the tenant with written notice of their decision; and
- Forward the application for consent to assign on to the appropriate person.
Consent decisions are very fact-specific, but case law outlines that refusal is likely to be deemed unreasonable when:
- The reason for the refusal of rent does not relate to the landlord and tenant relationship;
- The refusal of consent allows the landlord to gain a benefit;
- The landlord later relies upon grounds that it did not originally rely on (even if those grounds would have originally been reasonable);
Conclusion
The landlord's consent to assign a lease is a crucial step in the leasing process, ensuring that both parties are protected and that the property is properly managed.
Tenants seeking to assign their lease should carefully follow the procedures outlined in their lease agreement and work collaboratively with their landlord to obtain consent.
By doing so, they can facilitate a smooth transition and avoid potential legal pitfalls.