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Futureproof Your Commercial Lease
15
Sep
How To Assign A Commercial Lease
News

Are you a commercial tenant in rented premises and do you need to end your commercial lease early? Assigning a commercial lease is one of the ways you can do this and Commercial Property expert, Amy Husk explains the process.

What does it mean to assign a commercial lease?

Assigning a commercial lease means transferring the lease from one tenant to another.

The rights and obligations under the lease will be transferred from the outgoing tenant to the incoming tenant. The outgoing tenant is referred to in the legal documents as ‘the Assignor’ and the incoming tenant is referred to as the ‘Assignee’.

The incoming tenant will become liable under the lease for payment of rent and complying with all the lease covenants such as repair of the property.

The outgoing tenant may be released from liability under the lease covenants from the date of the assignment, but that will all depend on whether the outgoing tenant is required to enter into an Authorised Guarantee Agreement..

If the outgoing tenant is asked to enter into an Authorised Guarantee Agreement (often abbreviated to “AGA”) by the landlord as a condition of the assignment, then the outgoing tenant will normally guarantee the obligations of the incoming tenant until the end of the term of the lease, or until the incoming tenant themselves assign the lease with the consent of the landlord (whichever is earlier). At that point the AGA by the outgoing tenant will fall away So, an assignment does not necessarily mean the outgoing tenant will be free from the lease obligations entirely.

What are some reasons to assign the lease?

A lease assignment will usually take place where the outgoing tenant is selling its business to a new owner, restructuring or consolidating its property portfolio or closing its business entirely.

Who pays for the legal fees involved?

The outgoing and incoming tenant will usually bear their own legal costs or one may agree to pay the costs of the other depending on the bargaining strength of the parties and the deal that has been struck.

In addition to the outgoing and incoming tenant’s legal fees there will be legal fees payable for the landlord’s consent to the assignment, if consent is required. The lease will state that the outgoing tenant must pay the landlord’s fees relating for an application for consent. This could include surveyors’ fees for considering the financial strength of the proposed new tenant.

If the outgoing tenant is to bear the landlord’s legal fees, it is usual for an undertaking for those costs to be requested by the Landlord’s solicitors. This means that the outgoing tenant would need to pay the landlord’s legal fees into its own solicitor’s client account ‘on account’ of the landlord’s legal fees. This enables the tenant’s own solicitor to provide an undertaking to the landlord’s solicitors that their fees will be paid. An outgoing tenant should be aware that this is likely to be requested by the landlord.

What is a solicitor’s role in the proceedings?

The outgoing tenant’s solicitor’s main tasks are to:

  • Make the application to the landlord’s solicitor for the landlord’s consent to the assignment, where this is required
  • Draft the deed of assignment (unregistered lease) or transfer (registered lease)
  • Deal with any enquiries raised by the incoming tenant’s solicitor and
  • Review the draft Licence to Assign and Authorised Guarantee Agreement provided by the landlord’s solicitor.

The incoming tenant’s solicitor’s main tasks are to:

  • Raise enquiries with the outgoing tenant’s solicitor and obtain search results (where required) to ensure the incoming tenant is fully appraised of the property and the obligations it is taking on
  • Review the land registry title and the lease terms
  • Review the draft documents provided by the outgoing tenant and landlord’s solicitors.

The landlord’s solicitor will request information about the incoming tenant, confirm the conditions that must be met for consent to be granted and will provide the draft Licence to Assign / Transfer and Authorised Guarantee Agreement.

Commercial Property team

What are some things to consider when assigning a lease?

The number one consideration is always to check whether the lease permits the tenant to assign it at all and, if it does, whether the landlord’s consent is required. If the landlord’s consent is required the next step is to look at the conditions the landlord may impose and the circumstances in which the landlord is permitted to refuse consent to the assignment.

The outgoing tenant should also consider the strength of the proposed incoming tenant because the outgoing tenant may have to enter into an Authorised Guarantee Agreement guaranteeing the incoming tenant’s performance of the lease.

Are there any common issues or pitfalls that can be avoided?

Timescale

The issue that I have found causes the most difficulties for tenants is where they have not sought the landlord’s consent early enough. I have dealt with many lease assignments as part of larger corporate transactions where the parties have not applied for landlord’s consent for fear of having to disclose the business sale to the landlord. But in the end the failure to request the landlord’s consent early enough often causes delays to the business transaction.

The landlord is usually under an obligation not to unreasonably withhold or delay consent, however, the landlord is of course entitled to sufficient time to consider the application properly so a prompt application and clear communication to the landlord of the timescale is key.

Conditions

There can be problems where the landlord agrees to grant consent but only subject to certain conditions such as requiring a large rent deposit or guarantors. If the incoming tenant is not keen to agree to the conditions the negotiations can be tricky so it is important to review the lease to see what conditions the landlord is permitted to impose and pre-empt what might be required.

Dilapidations

Another issue I have seen cause delays and difficulties is properties where there are dilapidations (i.e. outstanding repairs that the tenant is obliged to carry out under its repair obligation in the lease). The landlord may not want to agree to an assignment unless an agreement is reached on dilapidations and this could involve having a survey carried out, potentially by both the landlord and tenant if they cannot agree. An agreement has to be reached as to which party is going to bear the financial responsibility of any dilapidations.

Do you have any advice for potential assignors/assignees?

  • Check the terms of the assignment provisions in the lease carefully
  • Seek legal advice early
  • Do not leave applying for the landlord’s consent to the last minute, especially where there is a wider business transaction involved
  • Both the outgoing and incoming tenant should consider at an early stage what state of repair the property is in and what is required by the repair obligation in the lease so that they are prepared should the landlord raise the issue of dilapidations.

For further advice on assigning a lease or other commercial property issues, contact Amy Husk.

Girlings has offices in Ashford, Canterbury and Herne Bay.

Before relying on this commentary please read the Reliance on information posted section in our Terms of Website Use in our Legal section. Please note that specialist advice should be taken in relation to any specific queries and the information above is provided for general information purposes only.

Authors

Amy Husk

Senior Associate Solicitor
Commercial Property
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Our Experts

Jeremy Burke

Head of Department
Commercial Property

Amrita Bartram

Partner
Commercial Property

David Redgate

Partner
Commercial Property

Amy Husk

Senior Associate Solicitor
Commercial Property

Simon Stempien

Senior Associate Solicitor
Commercial Property

Sophie Robins

Senior Associate Solicitor
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Allison Simmons

Conveyancing Executive
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Macauley Cubitt

Trainee Solicitor
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