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Tenants of commercial premises who want to dispose of their premises will usually have to obtain the consent of their landlord if they want to transfer (or ‘assign’) the lease to someone else. This also applies to underletting.
Are commercial leases transferrable?
In most cases the lease is transferrable with the consent of the landlord. However, some leases contain an absolute bar on assignment or underletting so it is important to review the relevant provisions within the lease, which will also detail the requirements of the landlord on any assignment or underletting. In this case the landlord may still be prepared to give consent but is entitled to refuse it.
Read more on commercial leases here.
Can the lease be transferred?
Almost every commercial lease contains restrictions on assigning, subletting or otherwise transferring the leased premises to another party and will detail any requirements for transferring the lease.
Ben Cobb is a Solicitor in the Commercial Property team. He says “These restrictions are reasonable in concept from the perspective of the landlord, so as not to have tenants circumvent the landlord's control of the premises.”
Obtaining landlord’s consent may seem a simple matter but it can never be regarded as a mere formality.
Ben warns “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.”
In view of the legal problems which can arise it is preferable to obtain advice from a solicitor before proceeding.
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 transferee.)
Underletting of the whole or part of the premises may be completely barred but may be permitted with landlord’s consent.
Leases are more likely to allow under- or sub-letting of part of premises (with consent) if they can be easily sub-divided, such as an individual floor forming part of a larger office block.
If a business is being sold as a going concern which includes the lease of premises then the landlord’s consent to the transfer will still be required.
Applying for the landlord's consent
An application for consent to assign should usually be sent to the landlord or its agents.
The tenant will be liable for the landlord’s costs whether or not the application is approved (although it may be possible to get the assignee to pay if the assignment is completed).
The landlord is entitled to ask for further documentation or information regarding the potential 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.
Landlords may refuse consent if the proposed new tenant cannot provide good references or has no previous trading history.
Can the landlord refuse consent?
Most leases will say that the landlord cannot “unreasonably” withhold consent, but in any case a proviso to the effect that consent is not to be unreasonably withheld will be implied by the Landlord and Tenant Act 1927.
The Landlord and Tenant Act 1988 also 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 may give consent subject to conditions.
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.
Ben says “Of course, the tenant may not agree with the landlord’s reasons if consent is withheld. 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?
There is a 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.
It is reasonable for a landlord to withhold consent to a proposed transaction in cases where, if they withheld consent and the assignment was completed, the tenants would be in breach of covenant. (For example, if there is an existing breach of covenant or new tenant is will clearly be using the premises for a type of business which is not permitted by the lease.)
Authorised Guarantee Agreement
If consent is given, the original tenant will probably be required to enter into an “Authorised Guarantee Agreement” with the landlord. Modern leases are likely to include a provision requiring an Authorised Guarantee Agreement as a pre-condition to any assignment.
An Authorised Guarantee Agreement means that the outgoing tenant guarantees the performance of the covenants in the lease by the person or company to whom the lease is being transferred.
This imposes a substantial potential liability on someone wanting to assign a lease so they should satisfy themselves as far as possible that the proposed assignee is going to be a good tenant.
Consent may also be subject to the assignee obtaining a guarantor or entering into a rent deposit deed, which gives the landlord further security for payment of the rent.
The Legal Documentation
If the landlord agrees to give consent this is usually recorded in a formal document known as a Licence to Assign. This will be prepared by the landlord’s solicitor or agents and the formal transfer of the lease to the new tenant should not be completed until the landlord has signed this Licence.
There will also need to be a deed of assignment/transfer between the original tenant and the new tenant detailing the various obligations of both parties.
Our Commercial Property Team are happy to discuss any issues that this raises for you and we offer a free initial meeting or chat on the phone.
If you have any questions, you only have to ask us at Frettens. Please call 01202 499255 or 01425 610100 and Ben or a member of the team will be happy to chat about your situation and your particular requirements.