Assigning a commercial lease involves transferring the lease to another person who then becomes the new tenant. In most cases this may require the consent of the landlord.
Nicola Phelps, a director at WHN who specialises in commercial property matters, provides an outline of the process for commercial landlords.
The process of assigning a commercial lease happens for several reasons. The existing tenant may wish to leave the commercial premises due to poor business performance, change of circumstances, or perhaps has been approached by another business wishing to take over the lease for their own prospective venture.
It requires several considerations which include:
- Understanding the legal framework then assessing the proposed assignee, the terms of the existing lease, and the implications of refusal of consent. It is also important to understand the roles and responsibilities of the outgoing tenant.
- Seeking practical advice on how landlords can approach the consent process including due diligence on the assignee, negotiation strategies, and the use of professional advisers.
- Recognising the common pitfalls involved in consenting to assign a commercial lease and how to avoid them.
- Appreciating the importance of maintaining a positive relationship with tenants and assignees throughout this process, as it can impact the long-term success of the commercial property.
The legal framework
Most commercial leases have a clause requiring consent to any assignment, which is qualified so that the tenant can assign but only with the landlord’s consent. If the tenant’s lease agreement is silent regarding assignments, the tenant is free to assign without the landlord’s consent.
If there is no reference in the lease to such consent not being unreasonably withheld or delayed, the landlord is under an implied duty not to unreasonably withhold its consent as outlined in section 19(1) of the Landlord and Tenant Act 1927 (the 1927 Act).
Any consenting landlord should also be aware that the Landlord and Tenant Act 1988 (the 1988 Act) imposes obligations to:
- Give consent (except where it is reasonable not to do so, which is a question of fact) within a reasonable time.
- Give written notice of the decision.
- Pass on applications for consent to the appropriate person.
However, the above obligations under the 1988 Act only arise where the tenant has made a written application for consent, and it is served by the tenant on the landlord (or another person as is mentioned in the lease). Failure to serve the written application for consent means the landlord does not have a duty to respond within a reasonable time.
Most modern-day leases however have the full qualified clause in that the landlord, in giving consent, must not unreasonably withhold or delay the giving of such consent. It is rare therefore that the 1927 Act and 1988 Act come into play.
As to what is a reasonable time, the general view is that it should be weeks rather than months. The time would start when the landlord has been provided with all the necessary information required to make the decision.
The role and responsibility of the outgoing tenant
The existing/outgoing tenant may or may not be released from its obligations in the lease once assigned. Again, in most modern leases, there should be provision for landlord’s consent to be subject to the outgoing tenant entering into an authorised guaranteed agreement (AGA).
This means the outgoing tenant is still liable for the tenant’s obligations under the lease, including rent and repair, and the landlord can still pursue the outgoing tenant.
It is important that all lease provisions are reviewed to ensure there is an AGA. If the lease was granted after January 1, 1996, the existing outgoing tenant would not remain liable unless it has entered into an AGA. For any leases granted before January 1, 1996, this would not be the case and the outgoing tenant would remain liable without an AGA.
Other usual conditions in consent to assign include the landlord, in its reasonable opinion, being satisfied that the new tenant would be of sufficient financial standing to enable it to comply with the tenant’s covenants in the lease.
Care must also be taken to ensure that landlord’s consent is not inadvertently given, and any correspondence should make it clear that no consent is given unless and until the agreed form of licence to assign has been completed.
The landlord should not be put to any costs in agreeing the assignment and solicitors’ fees should be borne by the outgoing/incoming tenant.
The financial stability and business credibility of the proposed assignee are paramount. It is important to conduct due diligence to ensure that the new tenant can meet the lease obligations. This may involve reviewing their financial statements, business plan, and references.
Practical advice before proceeding with the assignment
- Do your due diligence: Thoroughly vet the assignee to ensure they are a suitable tenant.
- Seek professional advice: Consider consulting with legal and financial advisers to navigate the assignment process.
- Retain clear communication: Keeping open lines of communication with both the current tenant and the proposed assignee is paramount. Clear, transparent dialogue can prevent misunderstandings.
Common pitfalls to avoid
- Ignoring tenant quality: Focusing solely on getting a tenant without considering their long-term viability.
- Overlooking lease terms: Ensure any consent to assignment does not inadvertently alter the existing lease terms to the landlord’s detriment.
- Delayed decisions: Unnecessarily delaying consent can lead to legal challenges and strain tenant relationships.
The importance of maintaining good relationships
The process of consenting to assign a commercial lease offers an opportunity to strengthen relationships with your tenants. Demonstrating a fair and professional approach can encourage loyalty and make future lease negotiations smoother.
In conclusion, consenting to assign a commercial lease requires a balance of legal knowledge, due diligence, and interpersonal skills. By approaching this process thoughtfully and strategically, commercial landlords can protect their interests and foster positive relationships with tenants.
Nicola specialises in all types of property development, including office, industrial, retail and residential estates.
She advises on the whole process from land acquisition to site set up and onward sale and commercial landlord and tenant matters. If you are a landlord seeking further advice or guidance regarding consenting to assign a commercial lease, or for any other commercial landlord and tenant matter, contact Nicola, on 01200 408300 or email nicola.phelps@whnsolicitors.co.uk.
