A lease assignment is a transfer of an existing commercial lease from one commercial tenant to another commercial tenant. Typically, it involves 3 different parties – Landlord, the tenant transferring its lease (known as the assignor) and incoming tenant who will take on the obligations in the lease (known as the assignee).
Depending on the lease terms, the Landlord usually has a significant degree of control in a lease assignment.
This article outlines 5 issues that tenants should be aware of in a commercial lease assignment transaction.
1. Landlord’s Consent
The Landlord’s consent is usually required before any assignment can take place and it is usually embodied in a formal document called a Licence to Assign. The Landlord will usually want to vet the incoming tenant to ensure that it has the ability to pay the rent and comply with the commercial lease obligations. The Landlord may require bank and trade references to assess the suitability of the proposed incoming tenant. If the incoming tenant is deemed to be unsuitable the Landlord may require a guarantor or may refuse permission for the proposed assignment.
Assignment of a lease, unfortunately, may not be the end of the outgoing tenant’s involvement with the lease. If the incoming tenant is not of sufficient standing then the Landlord may require the outgoing tenant to guarantee the payment of rent and the performance of the lease covenants by way of an Authorised Guarantee Agreement.
Whether you have to accept the Landlord’s request to enter into the agreement depends on the terms of the lease.
3. Change of Use
The incoming tenant may wish to use the premises for a different purpose to the existing use. For example, changing use from a hot food takeaway to a restaurant serving alcohol. It is imperative to check the permitted use for the premises both in the lease and the local planning office. If the lease only permits a narrow specified use then the Landlord’s consent should be sought for the proposed change of use and a deed of variation will be required. Otherwise, the incoming tenant could be at risk of breaching the lease terms which could lead to the forfeiture of the commercial lease.
4. Landlord’s Costs
Usually, the Landlord will request that the tenant is to pay his legal costs and other professional fees (e.g. surveyor’s fee) for dealing with the consent and preparing the Licence to Assign. It is usual for the Landlord’s solicitors to ask for an undertaking for the payment of their costs from the original tenant’s solicitors. The tenant should negotiate with the incoming tenant to share these legal costs in the Heads of Terms
5. Tenant Liability
Once the commercial lease has been assigned, the original tenant’s liability under the lease will usually end and the incoming tenant will take on all the responsibilities under the lease. Therefore, it is crucial for the incoming tenant to check that there have been no breaches during the outgoing tenant’s occupation and all rents have been paid up to date. If there are any lease breaches or rent arrears, then the outgoing tenant should remedy those breaches prior to the assignment of the lease.
Therefore, careful consideration should be given during negotiations on the assignment of a lease.
Whether you are a tenant or a landlord, unintended consequences could be avoided if appropriate advice is taken before the assignment of a commercial lease.