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As a commercial tenant, you may not be able to honour your commercial lease for the entire lease term. The lease term refers to the time period in which you occupy the property. This property may be your business’ HQ, warehouse or distribution centre. There are various reasons as to why you may want to terminate your lease early and assign the lease. This article will explain the three critical instructions for assigning a UK commercial lease.
Assignment
Assignment is a property transfer by the ‘assignor’ (the holder of the property) to the ‘assignee’ (the person receiving the property). As the commercial tenant, you are also the ‘assignor’ and, as such, may effectively assign your lease to another business owner. At this point, they become the new commercial tenant. This means that the new tenant is liable for the lease obligations in the commercial lease, such as rent payments and repair obligations.
The effect of an assignment is that you are now no longer a party to the lease. However, you will still be liable for the lease obligations if your landlord requires you to guarantee the new tenant’s lease obligations. This will be where an Authorised Guarantee Agreement (AGA) is put in place.
Whilst some commercial leases may not allow lease assignment, those which do will generally have conditions attached for the assignment to be valid. The assignment provision may detail whether there are conditions you must satisfy.
If you want to assign your commercial lease, you must know how to do so. Below, we detail three essential instructions to assign a UK commercial lease.
1. Find an Assignee
If you wish to assign your commercial lease, the first step will be to find a suitable business owner. They will be the assignee. A potential assignee will want first to inspect the lease terms in your commercial lease agreement before they agree to take on the lease. One term they will specifically look for is the permitted use of the commercial premises. This is because they will need to ensure that their business activities can occur on the commercial premises.
They may also want to carry out checks on, for example:
- the local authority;
- utility companies; and
- environmental issues.
It is not just your prospective assignee who will carry out checks when you assign the lease. You also will want to carry out checks on your prospective assignee, as will your commercial landlord. It is best to pre-empt the checks your landlord will carry out to ensure you select an assignee who can meet them satisfactorily. For example, you will need to check your assignee’s:
- financial status; and
- previous lease references.
2. Landlord Consent
Once you are satisfied you have found a suitable assignee for your lease assignment, you will likely need to get your commercial landlord’s consent before you assign your commercial lease. You should do this as soon as possible. UK law states that your landlord must respond to your request without unreasonable delay and should not unreasonably refuse to give consent for the lease assignment. It is advisable to get a solicitor to assist you with this.
Other Consent Considerations
Before you assign the lease to a specific business owner, you will also have to get your landlord’s consent that you may indeed assign the lease to this person. A landlord may include conditions in the commercial lease agreement as to who the assignee can be to ensure that the prospective tenant:
- can pay the rent;
- will look after the landlord’s commercial property; and
- will behave well on the commercial premises to avoid disturbing other businesses and tainting the landlord’s name.
Your landlord has the right to ask you to provide documents and information about the assignee. Your landlord may require information about your assignee’s position, such as their financial status, which you should have previously checked.
If your commercial lease details no conditions surrounding the assignment of a lease, such as the need to get your landlord’s consent, you will not need a licence to assign the lease.
3. Assign the Lease
Once you have found a business owner to be the assignee for your commercial lease and your landlord consents to them being the new commercial tenant, you can start the lease transfer process and assign the lease.
As the tenant, you are responsible for assigning the lease. The process might vary depending on the lease term. If the lease is for seven years or more, you should use a Land Registry form which is a TR1. This method involves a simple transfer of the lease and is suitable where your lease is a registered lease. Where your commercial lease is less than seven years, you can assign it with a deed of assignment. This method is suitable where the commercial lease is unregistered.
Deed of Assignment
Once the landlord consents to the proposed new tenant, the landlord and the new tenant will enter into a deed of assignment. This is the formal document that transfers your lease to the new tenant. It ends your duties concerning the lease, which the new tenant then takes over and agrees to be bound by. Since this is a legal document that all parties will need legal advice on, you and the new tenant must decide who will pay for the landlord’s legal fees.
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What Happens After the Lease is Assigned?
Provided you did not enter into an authorised guarantee agreement with your now ex-landlord, you are released from any responsibility concerning the commercial premises you leased. The new tenant takes those responsibilities on. If you had to enter into an authorised guarantee agreement to secure the landlord’s agreement to the new tenant, that new tenant is still responsible for abiding by the terms of the original commercial lease. However, you are still potentially liable for the new tenant’s breach of that lease.
Other Ways to End Your Lease Agreement
Before you ask your landlord if you can assign your lease to someone else, note that there are other ways to end your lease agreement early. These include:
- taking advantage of a ‘break clause’ (also known as an early termination clause) in your lease agreement;
- asking your landlord to agree to let you terminate your lease early; and
- asking your landlord if you can find a subtenant for the property you rent.
This cheat sheet outlines what you should be aware of in your lease agreement.
Key Takeaways
Assigning a lease allows a tenant to terminate a commercial lease before it comes to an end. It allows you to end your lease obligations and pass these on to another business owner. If you wish to assign your lease, there are three key instructions on how to assign your commercial lease. The first is to find a suitable assignee (a new tenant) for your commercial premises. The new tenant will need, for example, to carry on a business similar to yours. The second is to gain consent to assign your lease from your commercial landlord, which may require you to obtain a licence to assign. Your landlord must also agree to the new commercial tenant you propose as the assignee. It is likely your landlord will carry out financial checks to confirm the proposed commercial tenant’s financial health. Finally, you can assign the lease with a land registry form or deed of assignment.
If you need help understanding the key instructions to assign a commercial lease in the UK, contact our experienced leasing lawyers 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. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Lease assignment is when a commercial tenant transfers their lease to a third party. The third party will then take on the lease obligations and be the new tenant in a commercial lease.
The first key instruction when you want to assign a commercial lease is to find a suitable assignee; this is a third party that becomes the new tenant and is bound by the commercial lease.
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