Tenant considerations on an assignment of a commercial lease

It is common, upon taking a commercial lease, for a tenant to agree a contractual term longer than the tenant expects to be in occupation. The majority of new commercial leases that the writer finds passing her desk is around the ten year mark. If a tenant does not want or need to be in occupation for the duration of the ten years and the lease contains no provision for a break, a tenant will want to ensure that it has the ability to assign the lease to someone else.

There will be commercial considerations at play here: whether it is likely that someone will want to take on a tenant’s lease in the future; whether the terms of the lease attractive to future owners and whether the premises in an area of demand.

This article deals with the procedure for an assignment of a lease and focuses on what considerations a tenant will have when assigning their lease.

The first consideration ought to be whether the lease is assignable. Most leases permit assignment but place restrictions on the tenant and the proposed assignee. This is generally thought to be fair: the landlord will have heavily vetted the original tenant and they will want to have a degree of control over their new occupant. If a tenant fails to adhere to the assignment provision in their lease then this can constitute a breach of the lease so compliance is key.

More often than not a commercial lease will permit assignment of whole of their lease and premises with the landlord’s consent and, more often than not, such consent must not be unreasonably withheld. Usually, a landlord is entitled to recover legal and surveyor costs from the tenant in considering the application for consent so this must be factored in to the tenant’s financial considerations when assigning their lease to another.

Under statute and, often the express terms of the lease, obligations are imposed on a landlord to provide consent but will also govern what conditions a landlord may impose on a tenant to ensure the suitability of the incoming assignee.

Leases granted prior to January 1996 kept a tenant on the hook for the liability of the tenant covenants for the duration of the term. That meant that if a tenant took a lease for, say, 25 years and upon the 24th year of the term the current tenant defaulted on the rent, the original tenant could receive a sharp reminder in the post of the obligations that they entered into years ago. From January 1996 the Landlord and Tenants (Covenants) Act 1995 changed all this by imposing a statutory release for a tenant from its obligations after assignment of its lease.

This release was subject to the exception for a landlord to require, what is known as, an authorised guarantee agreement (otherwise known as an AGA). Generally speaking, an AGA contains a guarantee by the tenant of the performance, by the assignee, of those covenants from which the tenant has just been released. That guarantee is a one time only obligation: an AGA cannot extend the outgoing tenant’s liability in respect of a successor to the assignment. Therefore when the lease changes hands the next time, the outgoing tenant is released from its obligations for the rest of the term. For this reason it is key, for any tenant seeking to assign its lease, to first check out the strength of the financial covenant of its proposed assignee. The outgoing tenant will lose the right to operate its business from the premises and it will not be in active day-today control to assure that the incoming assignee behaves. Landlords will request references to, essentially, provide that the incoming assignee is “good for the money” but such references are as important to the outgoing tenant as they are to a landlord. In short: you may feel pleased to have found someone to take on your obligations but remember to check that they are the right person.

Assignments should include an indemnity from the incoming assignee to the outgoing tenant. An indemnity will require the incoming assignee to reimburse the outgoing tenant their financial losses should the landlord go after the outgoing tenant for a breach of the lease caused by the incoming assignee. However, such an indemnity may be of little value: the landlord will use the AGA as a second resort so if the Landlord has cause to go after the outgoing tenant, it may be the case that the existing tenant is not worth pursuing for losses.

Contact Nicky Cleightonhills on ncleightonhills@meaby.co.uk or +44 207 703 5034 for commercial lease matters.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply