Guest post by Judith Long
If you are renting a business property, you might come to a point where you want to move on. What are your options if you still have a lease running?
Firstly let’s look at what it means for a tenant to assign a lease:
- When a tenant sells their interest in a lease, the sale is referred to as an assignment.
- The seller (the tenant) can sell only the unexpired remainder of the term granted by the lease.
- The terms of the lease are not open to negotiation by the buyer because the lease is already in existence and the buyer (the assignee) must take it or leave it as it stands.
What Will the Landlord Expect?
The lease that you, as the outgoing tenant, are selling will almost certainly include a clause stating that the landlord’s consent to the assignment will be required. So do check your lease carefully – assignments are usually dealt with in a specific clause that is variously called ‘alienation’, ‘dealings’ or transfers’. The consent process will usually involve you entering into a formal licence to assign with the landlord before the assignment can be progressed.
Unsurprisingly, the landlord is likely to require various checks on the proposed new tenant, possibly including some financial assurances or guarantees. This can be the cause of some delay.
The lease is also likely to require you and your assignee to satisfy other conditions before the assignment is allowed depending on when your lease was granted:
- If a lease was granted before 1 January 1996, then the law provided that the original tenant remained potentially liable for payment of the rent and to observe and perform the other lease covenants for the whole term even if the lease had been assigned many times. In such leases, sometimes called ‘old leases’ by lawyers, because the landlord has the comfort of original tenant liability and the potential liability of successive assignees for the duration of the term, the main requirement will be to get landlord’s consent and enter into the licence to assign.
- Leases granted on or after 1 January 1996 – still sometimes called ‘new leases’ don’t make the original tenant potentially liable for the whole term, because the law was changed from that date. The law, however, allows landlords to require an assigning tenant to enter into an ‘authorised guarantee agreement’ (usually referred to as an ‘AGA’) under which the outgoing tenant guarantees the obligations of its immediate assignee but not any future assignees.
Any guarantor that you provided when you entered into the lease would also be required to enter into an AGA to underwrite your own AGA obligations.
There may be other conditions to comply with – the most common being getting a direct covenant with the landlord from the assignee (which is given in the licence to assign and will last for the duration of the term) and a requirement for the assignee to provide a third party guarantee also for the remaining duration of the term.
What Will your Buyer, the New Tenant, Expect?
The buyer (the assignee) will also raise enquiries and is likely to want to check at a minimum:
- The lease terms they will take over.
- That you are paid up-to-date on rent, service charges and outgoings.
- That the landlord agrees you are not in breach of the lease.
- The property title at HM Land Registry.
- Replies to pre-contract property enquiries.
Your rent deposit will also need to be returned and apportionments worked out if you have paid rent and service charge to the next quarter day.
Please note that this guide is not intended to be exhaustive and specialist legal advice is always recommended before assigning a lease. If you are looking for example Lease Assignments, ContractStore has suitable templates to download, including:
About Judith Long
Judith is a solicitor with her own practice and her specialist skills include all aspects of commercial property law and business law. With nearly 30 years experience in the law, she has worked in industry as well as private practice.