What a UK Commercial Tenant Should Know About Alienation Covenants

When you lease commercial premises for your business, you will sign a commercial lease agreement with your landlord. This will contain the terms and conditions for occupying the property, such as the rental amount and lease term. One clause your lease agreement is likely to have is an alienation covenant. Knowing what an alienation covenant is and what yours means is essential. This is because it affects a tenant’s abilities. For example, it could determine your ability, as the existing tenant, to end your lease agreement early. This article will explain what a UK commercial tenant should know about alienation covenants in commercial leases.

Alienation Covenants 

An alienation covenant in a commercial lease determines what you, as a commercial tenant, can and cannot do with the land you lease from your commercial landlord. It specifically prohibits, restricts or grants you a right to let others use the commercial premises. This is in terms of either:

• charging; 
• assigning; 
• underletting; or 
• sharing or parting with your possession of the commercial premises (for example licensing the premises).

Below we explain what these terms mean.

Assignment

When you assign your commercial lease, you transfer your interest in the commercial lease to someone who wishes to purchase it. You do this for the remainder of your commercial lease. This means you will no longer be the tenant, and the other party who takes on your commercial lease becomes the tenant. 

You may wish to assign your lease where the commercial premises no longer meet your business needs or perhaps where you want to sell your business. You should note that most leases typically do not allow you to assign only part of the premises. Rather, you will likely assign the whole premises. It is also rare for a commercial lease to permit assignment in any manner whatsoever. Accordingly, you may have to obtain the landlord’s consent. 

Underlet

Underletting your lease is where you sublet the premises or part of it to another and become their landlord. You, therefore, grant a lease from your commercial lease. Your lease is then referred to as the ‘head lease’ or ‘superior lease’, and your landlord becomes the ‘head landlord’ or ‘superior landlord’. 

Regardless of the sublease, you still have to abide by your lease terms with your landlord throughout your lease term.

Sharing or Parting With Possession

People may refer to sharing as parting with possession. This refers to allowing another party to occupy your commercial premises with you. However, this is not through an assignment or subletting. You may find sharing more common in retail and restaurant businesses. Where your alienation covenant allows sharing, it is usually only via a licence.

Charging

Charging a commercial lease happens in two different ways. One is where you, as the commercial tenant, take a loan from a bank on the basis that you give the bank security. The security usually includes all your company assets, including your commercial lease. Another way is where you get advance finance from your bank, and in exchange, they take a fixed charge on your commercial premises. A commercial lease charge will usually occur in restaurants rather than office premises. 

Negotiate

As any alienation covenant in your commercial lease could potentially restrict what you can do with your commercial premises, it is advisable that, as a commercial tenant, you negotiate this covenant before signing your lease. You should do this at the heads of terms stage. There may be a time when your business requires you to dispose of your leasehold interest, and your alienation covenant may not let you do this. 

Landlord’s Consent  

An alienation covenant typically restricts or prohibits what you can do with the land. In that case, it may do so with provisos that you need your landlord’s consent to exercise one of the prohibitions or restrictions. If the lease states that your landlord’s consent is necessary, then, depending on the phrasing, they may be legally required to be reasonable in granting that consent promptly.

There is no legal definition of what unreasonable means regarding alienation covenants. Instead, it will depend on the individual situation. A court might take certain factors into account, such as:

• the nature of the property;
• who the current tenant is;
• what the purpose of the tenant will be;
• rental amount; and
• how much of the commercial lease term remains.

Your lease agreement may contain examples of when your landlord can or will refuse consent, so you must look at this. If your landlord grants permission, it may be conditional on certain factors in the lease. For example, you may need to:

• provide a guarantor for your lease obligations and one that your landlord considers acceptable; or
• enter an ‘authorised guarantee agreement’.

However, the situation is slightly different if your alienation covenant contains restrictions and prohibitions that do not allow you to gain your landlord’s consent to proceed with these. In this case, your landlord can withhold consent regardless of whether or not it is reasonable, and they also do not have to provide any reason why they refuse permission.

Licences for Consent

Where the alienation covenant in your commercial lease states that you must seek your landlord’s consent, the landlord will usually document this via a licence. This standard document sets out the basis on which the landlord gives its consent, for example, a ‘licence to assign’ or a ‘licence to underlet’. The parties to these forms of a licence will be:

• you as the commercial tenant;
• your commercial landlord;
• the new commercial tenant/subtenant; and 
• any guarantor involved.

It is essential to take legal advice when you enter a licence like this.

Key Takeaways

An alienation covenant details your rights, restrictions and prohibitions in your commercial lease regarding an assignment, sharing the lease, charges and subleases. There are various points to be aware of in alienation covenants. For example, you should understand how these can affect your business decisions, so you should negotiate them before you sign your lease. Also, whilst an alienation covenant may restrict you, there are actions you may be able to take with your landlord’s consent. 

If you need help understanding alienation covenants in the UK, LegalVision’s 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. So call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions