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All lease agreements will contain a lease term end date. This is when the lease comes to an end. However, you may want to exit the lease early for several reasons. One way this may be possible is through lease assignment. An assignment is where a commercial tenant transfers their commercial lease to a third party. However, if you do not correctly execute the assignment, you will remain bound to the existing lease. This article will explain the main points you need to know about the assignment of a commercial lease.
What is an Assignment?
An assignment is where a commercial tenant transfers their commercial lease to a third party, the assignee. As a result, assignments may provide a method for a commercial tenant to exit a commercial lease before the lease end term date.
The rights to assign a commercial lease and the rules that accompany it should be evident in the commercial lease agreement. Any alienation provisions in the lease will contain these details. For example, a tenant will not usually be able to assign a lease where there is an outstanding breach of the commercial lease.
Key Points to Consider in a Lease Assignment
There are some key points a commercial landlord and commercial tenant needs to know about an assignment in a commercial lease. We explain some of these below.
1. What Happens If The Lease Agreement Does Not Contain Assignment Provisions?
Where there has been express agreement that the right to occupy the premises granted is only personal to the tenant, assignment is not allowed. On the other hand, where a commercial lease does not provide provisions on assignment, this means that there are no restrictions on the commercial tenant should they wish to assign the lease. Therefore, commercial landlords cannot stop assignment or set rules about it when a tenant decides to assign their lease.
2. Landlord’s Consent
Where a commercial lease agreement does provide provisions on the assignment of the lease, it will likely state that the tenant must get consent from the landlord to assign the lease. The law states that a landlord cannot unreasonably delay or withhold their consent.
Even if the lease agreement states otherwise, the lease cannot override the law. For example, if a lease provides that a landlord can give their consent after two months, the law will likely view this period as unreasonable.
3. Authorised Guarantee Agreement (‘AGA’)
When a commercial landlord does consent to a request to assign the lease from their tenant, they will likely attach conditions to this. These may include that the commercial tenant enters into an AGA, which means that they act as a guarantor for:
- the party who takes on the lease; and
- any third party they later transfer it to.
However, for a lease entered into or transferred to on or after 1 January 1996, the lease can impose this condition. If a was entered into after this date and is silent on this, a landlord might be able to impose an AGA if it is reasonable.
Say a landlord imposes an AGA as a condition of the assignment. As a result, the previous tenant as the guarantor may have to pay all overdue sums and reimburse the landlord for costs and losses in respect of the default if the third party (the new tenant) defaults on the commercial lease.
4. Financial Position
A landlord can refuse consent to assign if it is reasonable to do so. This means that if the assignee does not have the financial capacity to take on the lease, the landlord can refuse the assignment.
However, the commercial lease agreement may impose other economic conditions, such as:
- the assignee must be of the same financial strength or more than the current tenant who is assigning the lease; or
- a requirement that the assignee’s profit is greater than the rent by a specific amount.
Nevertheless, any financial requirement the lease imposes must be reasonably lawful.
5. Other Conditions
There may be other conditions a landlord may impose with an assignment. For example, they may want the assignee to use the same premises as the tenant who assigned the lease. They may also want to know what alterations, if any, the assignee intends to carry out on the premises before they decide to allow the assignment.
In addition to conditions a landlord imposes on the tenant for assignment, the tenant and the assignee may impose cost conditions. For example, if the lease rent exceeds the market rate, the assignee may request a premium payment from the tenant. Alternatively, the tenant may insist on it from the assignee where the lease is under the market rate.
This cheat sheet outlines what you should be aware of in your lease agreement.
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Key Takeaways
Assigning a commercial lease involves a tenant passing the lease to a third party who continues carrying out the lease obligations. In this sense, an assignment can allow you to exit a lease before the lease term ends. Nevertheless, the lease agreement may impose conditions on tenants regarding assignment. For example, the assignee might have to meet particular financial requirements, or the premise might have to be for the same business use. There are also legal rules about the assignment, such as those concerning AGA, and landlords can not withhold or delay their decision on assignment unreasonably.
If you need help understanding the main points you need to know about the assignment of a commercial lease 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.
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