Key Considerations Before Assigning a Lease

When you commit to a commercial lease, you will do so for a specific term. However, as a commercial tenant, there may be a time when you can no longer commit to the full length of your lease term. For example, your business may be struggling financially, or the lease is no longer affordable. Alternatively, your business may progress quicker than anticipated, so you need a larger commercial premises. An option to consider is assigning your lease. We explore key considerations for doing so. 

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What is a Lease Assignment?

In a lease assignment, you transfer your lease to someone not currently party to the commercial lease. It means your current retail lease continues to exist rather than terminates early. While the rights and obligations in your lease agreement continue, these obligations pass to another party, the assignee. Subsequently, the assignee takes on your role as the commercial tenant, including your lease obligations. 

Key Considerations

Reviewing Potential Costs

Before assigning a commercial lease, consider the cost of doing so. For example, your landlord may incur legal fees as part of the assignment, and you may need to reimburse them for these. You will also have your own legal fees to pay when you assign the lease. 

The cost to assign your lease also depends on your rental price in comparison to the current market rate. If it is higher than the market rate, the assignee may require you to pay a premium to them to account for the high level of rent.

However, costs may not be such a problem when assigning a lease if your rent price is lower than the market rate. In these circumstances, you may be able to request that the assignee pay you a premium instead. 

Obtaining a Licence to Assign

When assigning a lease, you will likely need your landlord’s permission. Your landlord will want to ensure that any assignee is a suitable prospective tenant for the commercial lease. Importantly, you should always refer back to your commercial lease. Commonly, your lease will restrict a tenant’s ability to assign the lease without their landlord’s consent. If this is the case, you will need their approval and obtain a licence to assign. 

Gaining Landlord Approval

Where your commercial lease requires you to obtain a licence to assign the lease, your landlord will want to be satisfied with the assignment before they agree. To gain your landlord’s approval requires the incoming tenant to be of ‘good standing’. The types of issues your commercial landlord may check include:

• previous landlord references;
• copies of bank statements; and
• copies of audited accounts.

Therefore, when you consider assigning your lease, knowing the areas your landlord will look into may help you suggest a suitable assignee.

Finding a Suitable Assignee

Assigning a lease is not as simple as letting another person occupy the commercial space. Indeed, the assignee will want to carry out specific checks on the property to determine if the space is right for them. For example, the potential assignee is likely to check:

• that the rent level is affordable;
• environmental issues with the local authority;
• that the lease terms are not too onerous; and
• the lease terms permit their business activities. 

Considering Your Landlord’s Checks

Part of finding a suitable assignee is anticipating what your landlord will look for in an oncoming tenant. While you might like the assignee on a personal level, your landlord will need to approve the assignment. Accordingly, finding an assignee involves considering the checks your landlord will likely conduct upon the prospective assignee and ensuring they meet these.

Signing an Authorised Guarantee Agreement

Finally, it is critical to remember that you may still be responsible for the commercial premises, even after you assign it. This liability is common where your landlord asks you to guarantee the assignee’s lease obligations. After you sign an authorised guarantee agreement, you will be liable to pay any missing rent and meet other lease obligations if the assignee fails to do so. 

An authorised guarantee agreement acts as a safety net for your landlord in the event the incoming assignee is not of good standing. Rather than being left without recourse, a landlord will seek to recover damages (monetary compensation) from you. While this might not be ideal, gaining your landlord’s consent may be conditional upon you signing an authorised guarantee agreement. Therefore, you want to carefully consider whether this risk is worth the assignment and take extra care when finding a suitable assignee. 

Key Takeaways

A lease assignment is where you transfer your commercial lease to another party. While your lease continues, the new assignee will be responsible for its obligations. If you decide to assign a commercial lease, there are key considerations to note. In particular, you will need to obtain a license to assign and gain your landlord’s approval. You will also need to consider whether you can find a suitable assignee.

If you need help assigning your lease, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.

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