At Darlingtons, we specialise in commercial property and advise both landlords, current tenants, assignees and guarantors on commercial property lease assignments – get in touch for a quote or advice.
Commercial property leases just in London, range from offices to shops to industrial units, pubs, hotels and other specialist properties. Most commercial leases are fairly long term contracts, with most being 5-10 years in length, possibly with break clauses.It is common for businesses to outgrow premises or to want to move and in such situations, assignment or sale of the lease is often the solution. In fact, it is somewhat reassuring for original tenants who sign up to long leases to think that they can sell on the lease in the future, when signing up to such long commitments.
However, commercial lease assignments can be complex, costly and frustrating, so whether you are the Landlord, considering whether to grant licence to assign, the current tenant who wants to assign or a prospective assignee (buyer of an existing commercial property lease) it is important to get good advice.
The contract for transfer of a commercial lease is not generally a very lengthy or technical document. If you are buying a commercial lease, remember you are taking over all the liabilities as well as the rights. What can complicate lease transfer agreements is the necessity to have the Landlord’s consent and that it is usual for the Landlord to insist on the selling current tenant to agree to guarantee the new tenant’s obligations. Another area which can be problematic is payment of costs. For a fairly simple process as regards the Landlords input, it is common for the Landlord to insist that his, her or their legal costs are paid, which can be quite expensive.
Virtually every commercial lease will have a clause about assignment. Most clauses will state that assignment is permitted but with Landlords consent, and that consent cannot be unreasonably withheld.
If the clause says no more, in a way it is unhelpful, as it is better if the clause contains specifics as to what may or may constitute reasonable grounds for a Landlord to object.
Much depends on the wording of the lease. In most cases, a landlord will need to be able to argue that the proposed new tenant is, for financial reasons or reputationally, more risky than the existing tenant. The Landlords argument is made harder by the fact that in many cases then outgoing tenant will still be liable under an Authorised Guarantee Agreement (AGA).
The difficulty with the landlord refusing consent is that any action by the tenant at court to force the issue takes time and comes with risk. In reality, the proposed new tenant may have changed their mind and become frustrated by this point in any event. Landlords often know this and seek to stall rather than refusing consent outright, so it is important to balance out seeking to keep the Landlord on side as against not allowing the matter to drift.
With lease assignments, the landlord will often want to carefully consider the bona fides and solvency of the prospective new tenant, including taking up references and other financial checks.
A landlord may well insist on a fee for even considering whether to accept a proposed replacement tenant. The landlord is highly likely to expect detailed financial information and references, so the earlier these are obtained the better.
If the Landlord agrees in principle to grant licence to assign, he or she will almost certainly also require lawyers fees to be paid – these can be expensive, often between £700.00 to £1,0000.00 plus vat, for a fairly simple document, so the current tenant and assignee will need to agree who will pay.
If you are considering buying an exiting commercial lease, you will need a competent and experienced lawyer to check the terms of the lease, ensure that there are no hidden pitfalls and that you don’t inherit problems. for example, dilapidations clauses can be very costly and if there was no schedule of condition at the beginning of the lease, you can get financially clobbered when it expires.
If you are taking over a lease part way through, and especially if you have a long term plan or have paid a premium, you need to be sure that there are no breaches of the lease, that rent reviews are up-to-date and that the lease is likely to be renewable. A solicitor acting for an assignee will need to make enquiries and checks as comprehensively as if acting for a tenant of a new lease, including matters such as insurance, service charges, permitted use as examples.
A commercial lease is likely to include a stipulation whereby, on assignment, the outgoing leaseholder will have to enter into an Authorised Guarantee Agreement, also sometimes known as an AGA.
If there is an opportunity to negotiate out of the situation, clearly the current tenant should explore this but it isn’t generally easy or to cap liability either. One possibility for the current leaseholder to protect themselves is to require the assignee to deposit an amount, generally over and above replenishing the rent deposit to offer a degree of protection for the seller.
If your lease was granted pre-1996, then landlords can look to any former tenants as of right, for liability for a breach by the current tenant. It might be that the lease has been assigned several times since you were the tenant. That does not matter, the landlord can still pursue you for breaches by the current tenant.
With leases which started post-1996, landlords ado not have the above right so they instead require, in the original lease granted that the outgoing tenant looking to assign the lease must provide an authorised guarantee agreement on assignment of the lease. The advantage of this agreement is that the liability to guarantee your successors’ obligations comes to an end when your immediate successor assigns.