If you are the tenant of a commercial premises who wants to transfer their lease you may have questions like:
- Can I transfer my commercial lease to someone else?
- Can the lease be assigned?
- Do I need the landlord's consent to transfer a commercial lease?
In her first article for the firm, Commercial Property Expert Kirsty Oak, covers everything you need to know about transferring a commercial lease.
Can I transfer my commercial lease to someone else?
Whether you can transfer a commercial lease to someone else will be determined by the lease itself.
Some leases may be silent and a transfer may be permitted without restriction. Other leases may contain an absolute bar on a transfer.
In most cases, though, the lease can be transferred, but the lease will require the landlord’s consent to do so. Therefore, it is important to review the relevant provisions within the lease.
Read more on commercial leases here.
Can the lease be assigned?
Most commercial leases contain restrictions on assigning the premises to another party. The landlord will set out their requirements that must be met before the lease can be assigned to a new tenant.
Kirsty Oak is a Solicitor in the Commercial Property team. She says “These restrictions are reasonable from the perspective of the landlord as the requirements assist the landlord in retaining an element of control in deciding a suitable incoming tenant”
Is subletting allowed?
Sub-letting all or part of the property may be completely barred or allowed if the landlord consents. This will depend on the lease.
Leases are more likely to allow sub-letting of part if the premises can be easily sub-divided. For example, an individual floor forming part of a larger office block could be easily sub-divided.
Do I need the landlord’s consent to transfer a commercial lease?
Tenants of commercial premises who want to assign or sublet the whole or part of the premises to someone else will usually have to obtain the consent of their landlord. This will depend on what the lease states.
Where consent is required, the relevant provisions within the lease will detail the requirements of the landlord. In these circumstances, the landlord may still be prepared to give consent but is entitled to refuse it where the requirements are not met.
It is usual for the severity of the requirements to differ in nature depending on whether the consent is for an assignment or sublet as it will depend on the relationship and direct responsibility of the incoming tenant to the landlord.
For example, a common requirement may be that consent may be subject to an assignee obtaining a guarantor or entering into a rent deposit deed, which gives the landlord further security for payment of the rent. However, this may not be required where it is a sublet as the incoming subtenant is not directly responsible to the landlord for the rent.
How do I apply for the landlord’s consent?
An application for consent should usually be sent to the landlord or its agents. The landlord is entitled to ask for further documentation or information regarding the potential incoming tenant, in order to make a decision.
What will the assignee need to do?
It is usual for landlords to request three years audited accounts for the proposed assignee/undertenant, as well as up-to-date management accounts and references from professional advisors and trade references.
A reference from an existing landlord of other premises for the payment of the rent and compliance with the lease terms may also be required.
Can the landlord withhold consent to transfer a commercial lease?
The lease may specifically say that the landlord cannot “unreasonably” withhold consent.
The Landlord and Tenant Act 1988 states that a landlord owes a duty to the tenant to give consent except in a case where it is reasonable not to give consent.
The landlord is also under a duty to deal with an application within a reasonable time and must give the tenant written notice of his decision whether or not to give consent. If the consent is withheld, the landlord must specify its reasons for withholding it.
Our team says “Of course, the tenant may not agree with the landlord’s reasons if consent is refused. If the landlord cannot be persuaded to change its mind, it is possible to challenge the decision in the courts, but this can be difficult and expensive.”
What is a “reasonable” ground for the landlord to withhold consent?
Landlords may withhold consent if the proposed new tenant cannot provide good references or has no previous trading history
It is also reasonable for a landlord to withhold consent to a proposed transaction in cases where, if the assignment was completed, the tenants would be in breach of covenant. An example of this would be where the new tenant will clearly be using the premises for a type of business which is not permitted by the lease.
What is an Authorised Guarantee Agreement?
In addition to obtaining consent, many commercial leases include a specific condition that the outgoing tenant will be required to enter into an “Authorised Guarantee Agreement” with the landlord. This may also include their guarantor, if any, to do so as well.
An Authorised Guarantee Agreement means that the outgoing tenant guarantees the performance of the covenants in the lease by the assignee.
This imposes a potential liability on someone wanting to assign a lease, as the landlord may take immediate action against the outgoing tenant if the assignee breaches the terms of the lease during its term.
The landlord would then require the outgoing tenant to immediately enter into a new lease of the premises. Therefore, any outgoing tenant should satisfy themselves as far as possible that the proposed assignee is going to be a good tenant in order to satisfactorily protect themselves.
Is a commercial lease transfer a good idea?
There may be times when a business no longer requires use of the property due to a change, relocation or downsize. Where there is still time left on the lease and no provision to break the lease, the tenant would have to continue paying the rent and complying with the terms of the lease.
By assigning the lease to another party, this reduces this liability. The outgoing tenant would need to consider how long is left on the lease as it may prove difficult to find someone who would want to take the lease for a short period of time.
How much does it cost to transfer a commercial lease?
Assigning a commercial lease will typically involve various costs. One of these costs will the legal fees of the solicitors involved. The fees in this regard can vary but often cost around £1750 plus VAT for each party.
The outgoing tenant will be liable for the landlord’s costs whether or not the application is approved, although a contribution could be negotiated with the assignee. The tenant and assignee may also wish to instruct their own solicitors and it is usual that each bear their own costs.
Why do you need a Commercial Property Solicitor?
In view of the legal problems which can arise it is preferable to obtain advice from a solicitor before proceeding with an assignment.
Obtaining landlord’s consent may seem a simple matter but it can never be regarded as a mere formality.
“Failing to obtain the landlord’s consent when it is required can lead to severe financial penalties. Consent should always be recorded in a formal document to avoid arguments” say our experts.
If premises are assigned without consent, the landlord may not recognise the new tenant at all and continue to hold the original tenant liable for the rent and all other provisions of the lease (including any breaches of covenant by the assignee.)
There is also substantial body of case law as to what is or is not “reasonable” in this context, so, again, it is highly recommended to speak to a solicitor who specialises in this field.
Specialist Commercial Property Solicitors
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If you have any queries following this article, please don’t hesitate to get in touch with our bright Commercial Property team by calling 01202 499255 or by filling in the form.
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