What is a Virtual Assignment of a Commercial Lease in the UK?

When a commercial tenant and landlord commit to a lease, the landlord is taken to have granted the tenant with the right to occupy their property. As a commercial tenant, you may occupy the premises for a specific period; this is referred to as the ‘lease term’. A commercial lease agreement is legally binding, so each party must abide by the lease provisions for the entire lease term. However, you may want to exit the lease agreement before the lease term elapses. One way would be to assign your lease to a new commercial tenant; a variation of this approach is to assign the lease virtually. This article will explain virtual assignment of a commercial lease in the UK.

Actual Assignment  

Lease assignment is where a commercial tenant, the assignor, transfers or sells their commercial lease to the assignee, a third party. The third party will typically be another business owner. The assignee will take over the current tenant’s lease obligations, and you, the previous commercial tenant, will no longer be a party to the lease. Consequently, if you are a tenant assigning the lease, your role in the commercial lease terminates. 

You will only incur lease obligations if the commercial landlord requires you to sign an Authorised Guarantee Agreement (AGA), which means that you will guarantee the new tenant’s lease obligations. Should the new tenant fail to adhere to these, you will be obligated to fulfil these obligations. You may hear others refer to this as an actual commercial lease assignment.

The actual assignment of a commercial lease will take place through either a transfer using a Land Registry form TR1 for registered leases or a deed of assignment for unregistered leases.

Virtual Assignment of a Commercial Lease in the UK 

You can also transfer the lease via a virtual assignment. This is different from the actual assignment of a commercial lease. 

Virtual assignment of a commercial lease in the UK is similar to actual assignment. However, via virtual assignment, the lease itself is not transferred, only the obligations of the lease. Under this arrangement, a contractual agreement forms between you and the incoming tenant. Notably, your current landlord has no say in the matter. Subsequently, for your virtual assignment of a lease to be valid, it does not require the consent of your landlord. Additionally, when you virtually assign a lease, you are not in breach of the alienation provisions in your current commercial lease agreement. 

Effect of a Virtual Assignment in the UK

The contract that you create through the virtual assignment of a lease transfers the leases:

• economic benefits;
• burdens; and 
• other obligations.

While you can conduct a virtual assignment by forming a contract with the proposed new tenant, you can also virtually assign a lease by creating a declaration of trust.

As such, when a virtual assignment takes place, the assignee has to comply with all the lease obligations, which include rental payments, as these form part of the new contractual agreement. Yet, because you have not transferred the commercial lease, you retain the right to occupy the commercial premises. The incoming tenant, the assignee, has no right to share the property or to fully occupy it. This also means that you still have liability under the lease. Consequently, should the assignee fail to pay rent, the landlord can request that you satisfy the debt.

Why Complete a Virtual Assignment?

Although the virtual assignment of a commercial lease is uncommon, you may wonder why you might choose this as opposed to actually assigning the lease. Typically, you would virtually assign a lease due to an assignment provision in the commercial lease agreement. If the assignment provision is particularly restrictive, you, as the commercial tenant, may bypass this by virtually assigning the lease. However, you should note that if a commercial lease prohibits virtual assignment, you should proceed with caution in deciding whether to enter the commercial lease or not. 

A further reason as to why you may choose to virtually assign the lease is because you fear your landlord may not give consent to the assignment or because the landlord sublets the business premises. If the landlord sublets the business premises, virtual assignment allows you to outsource the management role contained in your lease agreement. This means that the assignee will be responsible for the collection of rent from the subtenant and will then pass this on to the commercial landlord.

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Key Takeaways

Virtually assigning a commercial lease is where you, as the commercial tenant, assign the lease obligations to a third party but not the lease itself. This is possible via a new contract with the third party, the assignee. This means that the assignee adopts the lease obligations but does not have a right to occupy the commercial premises. Only you, as the commercial tenant, retain this right. You will also be liable for the lease obligations in the commercial lease if the assignee fails to meet the same ones in the contract they have with you. Finally, you might choose a virtual assignment where your commercial lease has stringent assignment conditions.

If you need help understanding what the virtual assignment of a commercial lease in the UK is, 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.

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