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There are many different provisions in a commercial lease. One of these may be the alienation clause. If an alienation clause is present in a commercial lease agreement, it may detail an action that allows a current tenant to end the lease early before the lease term end date. Under this process, tenants can effectively assign the lease. Commercial tenants and commercial landlords need to understand lease assignments to ensure they are clear about their rights and obligations. This article outlines four key points to note about a commercial lease assignment in the UK.
What is an Assignment?
When a commercial tenant transfers their lease to a third party, they assign the lease. The commercial tenant who assigns the lease is the assignor, and the third party who becomes the new tenant is the assignee.
With lease assignment, the lease still exists in the same format, and the assignee simply takes on the lease obligations. As a result, the assignee will pay the rent and carry out other obligations under the agreement, including the tenant repair obligations. The assignor is the outgoing tenant and, thus, no longer party to the commercial lease unless the commercial landlord requires them to be part of an Authorised Guarantee Agreement.
1. Landlord Checks
If lease assignment is included in a commercial lease, the commercial landlord will want to carry out some checks first. The checks verify the suitability of the incoming tenant.
A landlord will typically check the incoming tenant’s:
- financial status;
- previous references;
- how they wish to use the commercial premises; and
- whether they may want to make alterations to the commercial property.
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2. Authorised Guarantee Agreement (AGA)
When a commercial tenant requests to assign the lease, a commercial landlord will decide whether they require the outgoing tenant, the assignor, to enter into an AGA. A commercial tenant should be aware of this possibility as it will mean they are not entirely free from the commercial lease. A landlord will likely require this when unsure about the new tenant’s covenant strength.
An AGA is an agreement where the outgoing tenant acts as a guarantor for the lease obligations of the incoming tenant. They will do this until the lease agreement comes to an end at the lease term end date. However, if the incoming tenant agrees with the commercial landlord to assign their commercial lease, the commercial tenant’s obligations under the AGA will come to an end at this point instead.
3. Legal Fees
If a commercial tenant decides to assign their lease with their landlord’s consent, there will be legal costs to pay. Legal fees will arise for the:
- outgoing tenant;
- commercial landlord; and
- incoming tenant.
Regarding costs for the two commercial tenants, each will usually pay their own. However, they may decide that one will pay both parties’ costs. You should also note that there may be additional non-legal costs between the two commercial tenants. This is where one of them may have to pay a premium to the other because the rent amount is either higher or lower than the market rate.
An outgoing tenant’s request for assignment also incurs costs. An application for consent can include costs for surveyors, given the landlord will need to assess the covenant strength of the incoming tenant, such as their ability to pay the rent. The lease will typically detail that the outgoing tenant bears these costs usually by paying fees into their own legal representative’s account, who will use these to promise the landlord’s solicitor they will receive their fees.
4. Seek Legal Advice
The commercial landlord and outgoing and incoming tenants will need solicitors. Solicitors for all parties will have a crucial role to play during the assignment of a commercial lease. Some of the roles include:
- creating the application for consent to assignment for the commercial landlord;
- creating the documentation for assignment, which is a deed of assignment or a transfer;
- carrying out searches on the commercial property;
- checking the commercial lease agreement terms and the land registry title; and
- asking for information on the new tenant and stating what conditions it expects both tenants to meet for the assignment.
This cheat sheet outlines what you should be aware of in your lease agreement.
Commercial lease assignment is when a commercial tenant passes their lease to a third party who is the incoming tenant. The outgoing tenant is the assignor, and the incoming tenant is the assignee. There are many critical points that commercial tenants and landlords need to note about the lease assignment of a commercial lease. For example, a commercial landlord will want to conduct checks on the incoming tenant, such as their financial status and any references. Also, all parties will need solicitors to represent them during the lease assignment, and each party’s solicitor will have a different role to play in the assignment.
If you need help understanding key points to note on commercial lease assignments 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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