Commercial Lease Assignment
There are many reasons why a tenant may wish to explore their ability to end their tenancy prior to the end of the lease. For example, the premises may be too small for the tenant’s growing business or the tenant may be experiencing some financial difficulty and require a new premises and new lease that better suits their needs. Commonly in such circumstances, a tenant may seek to transfer or ‘assign’ the remaining term of their current lease to another party.
The starting point for any lease assignment is to review the current lease terms. The clause of a lease dealing with an assignment is commonly referred to as the ‘alienation’ clause. This clause sets out the conditions that must be met before the Landlord will provide their consent. Although the Landlord cannot unreasonably withhold their consent, they are under no obligation to provide their consent if the new tenant does not meet these conditions; therefore, whilst a new tenant may have been found, they may not be suitable.
Such conditions may include the Landlord assessing the incoming tenant’s financial standing. This will be a good indicator of the likelihood of the tenant being able to meet their financial liabilities under the lease, such as paying the rent and service charges.
In addition to the requirements contained in the Lease, the Landlord may also seek formal references from the proposed new tenant, including those from the tenant’s previous Landlord.
It is important to recognise that the assignment of a lease to a new tenant does not automatically release the current tenant of all liabilities.
This is dependant upon the commencement date of the current Lease. For example, if the lease began prior to January 1996, the general rule is that the current tenant, will remain liable for all payments by any subsequent tenants. On the contrary, if the lease began after January 1996, Landlords will ordinarily require the current tenant to sign an Authorised Guarantee Agreement, meaning that the current tenant will only remain liable for payments due from the new tenant, but not any further tenants.
To avoid such liability, the tenant could seek to fully terminate the lease by way of a Surrender (i.e a formal Deed documenting the agreement to bring the lease to an end) and thereafter the new tenant could enter into a brand-new Lease, thereby avoiding the continuing liability described above.
In addition to assigning the Lease, a tenant may wish to consider other means available to them, which may include exercising a break clause or even sub-letting the premises. Once again this will depend upon the terms of the Lease.
All the above emphasises the importance of negotiations before the commencement of the contractual term.
For further information, please speak to a member of our property department.