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A commercial lease will detail how long you, as the tenant, may occupy the premises owned by the landlord. This is known as the ‘lease term’. Due to business circumstances changing, you may no longer wish to occupy the premises for the duration of the lease term. If so, one option may be to assign your lease. However, you can encounter problems when assigning a UK commercial lease, so it is helpful to be aware of these in advance. This article will explain the potential problems when assigning a UK commercial lease that a tenant typically encounters.
What is a Lease Assignment?
Lease assignment is where a commercial lease tenant transfers their existing lease to a third party. The commercial tenant is the assignor, and the new tenant is the assignee. When you assign your lease, your rights and obligations under the lease transfer to the assignee. Likewise, the assignee is responsible for upholding the lease moving forward, and you are relieved of your lease obligations. The new tenant, for example, will have to pay rent and carry out repairs and will also naturally occupy the property.
Potential Problems
Lease assignments are a valuable way to dispose of your lease obligations. However, they are not without potential problems. We discuss some of the potential problems when assigning a UK commercial lease below.
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Cost of Assigning the Lease
Assigning a lease can be costly. Commercial tenants often do not begin the process of assigning their commercial lease due to the cost involved. Solicitors fees substantially contribute to the overall cost of assigning a lease as it is crucial to take legal advice and assistance when you assign a commercial lease. The rent price for the commercial premises is another relevant cost factor. Your potential assignee may demand that you pay them a premium to account for the difference if the rent price is above the market rate.
Failing to Get the Landlord’s Consent
To successfully assign a lease, you must go through a specific process. Obtaining your landlord’s consent to the assignment is a stage of the process. This stage takes time, as your landlord will likely need to carry out checks on the potential new tenant.
When assigning your commercial lease, leaving enough time for the assignment process is critical. You may leave the assignment to the last minute, maybe because you are selling your business and do not want to reveal these details to your landlord. Failure to obtain your landlord’s consent to the assignment in a reasonable time could cause your business sales to fall through the floor, in which case, the assignment may no longer be possible or desirable.
Not Fulfilling the Lease Terms
You will typically need your landlord’s consent to assign the lease validly. However, landlords usually attach conditions to the assignment. For example, a standard condition attached to lease assignments is that the tenant’s rent payments must be up to date. Before you consider assigning your commercial lease, it is worth ensuring you comply with these conditions.
Likewise, you must always comply with your lease obligations arising under health and safety laws, fire regulations and asbestos management. If you breach these lease terms, your landlord might request you to fulfil your obligations before you can assign the lease. This can delay lease assignment and may also cause your assignee to get cold feet.
Ignoring the Landlord’s Requirements
Your landlord may consent to the lease assignment, but their consent may be conditional upon you or the assignee fulfilling specific requests. For example, your landlord could request:
- a hefty rent deposit;
- a guarantor; or
- that you enter into an Authorised Guarantee Agreement (AGA).
The latter means you, as the assignor, act as a guarantor for the incoming tenant, the assignee, regarding their lease obligations. You may find an AGA problematic for you and your business as it does not fully release you from your lease obligations.
An assignee may be discouraged from entering into the potential lease assignment if your commercial landlord requests for either or both of the initial two conditions to be met. This is because the assignee may not be able to satisfy these conditions or may not want to.
Failing to Make Repairs
Assigning your lease to a third party, in effect, terminates your lease obligations as a commercial tenant. This situation is comparable to if your lease term ended and you vacated the commercial property. Your landlord, at this point, will generally check if there are any repairs you have not carried out but should have done. These are known as dilapidations. Dilapidations can delay your lease assignment if you have not carried out the necessary repairs and dilapidations are present. Your landlord will want to confirm how to proceed, and this may involve decisions concerning whether you or the assignee incur the financial costs for fixing the dilapidations.
Not Meeting the Minimum Energy Efficiency Standards (MEES)
A final potential problem to be aware of if you are considering assigning your lease is the rules around MEES. The MEES require an Energy Performance Certificate (EPC) for the commercial property. If this certificate has expired, it is illegal to market the property. Accordingly, the commercial property lease cannot be assigned until the property has a valid EPC.
This cheat sheet outlines what you should be aware of in your lease agreement.
Key Takeaways
A commercial lease assignment is where you transfer your lease to a third party. If you decide you want to assign your commercial lease, you should be prepared for potential problems that could occur. For example, the commercial property lease may be unassignable if you have not arranged for the property to receive the necessary repairs or if the property does not have a valid EPC. Similarly, if you do not satisfy the lease terms around the assignment, you may be prevented from assigning the lease until these are met.
If you need help understanding problems which could occur when you assign your 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 assigns their lease to a third party.
If you are planning to assign a commercial lease, a problem that may arise is that you do not meet the conditions for assignment in your lease agreement. For example, a condition might be that your landlord must provide their consent to the incoming assignee. If you fail to gain your landlord’s permission, the assignment may be invalid. It is always best practice to review the requirements of your lease agreement.
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