Businesses need premises from which to operate and often occupy their premises pursuant to a commercial lease. However, businesses’ needs can quickly change and, for one reason or another, a business may need to leave a property earlier than they had initially envisaged. Here we consider one way in which a business tenant can leave a property before the end of their lease, by assigning their lease.
Process of assigning a lease
You may wonder what ‘assigning’ a lease means. Well, it simply means transferring a lease to another party so that the new party becomes the tenant. Following completion of the assignment the lease continues to run and the new party becomes the tenant and becomes liable for all of the tenant obligations in the lease.
The first step, then, is to find someone who may want to take over the lease (‘assignee’). As the assignee will be taking over the existing lease, rather than negotiating their own lease, they will have to be happy with its terms. A prudent assignee will want to review the lease to ensure that it does not contain any onerous terms. The due diligence process undertaken by a prudent assignee will be very similar to if it were purchasing a commercial property.
Once an assignee is found and they are happy to take on the lease, the lease must be assigned. If the lease is registered at the Land Registry (which it must be if the lease is for more than 7 years) then the document used to assign the lease will generally be a Land Registry form known as a TR1. If the lease did not need to be registered at the Land Registry, then the solicitors will prepare a deed known as a deed of assignment. Both a TR1 and a deed of assignment need to be executed by both the current tenant and the assignee.
Depending on the terms of the lease, the landlord’s consent may be required. We explore this in more detail below.
When and why to assign a lease
An assignment of a lease will take place when a lease has not yet expired, but the tenant no longer requires use of the property. For example, a business could have taken a five-year lease, but after two years it decides it needs to move to bigger premises. Unless the lease includes break clauses, the business would be required to continue to pay the rents and comply with the lease terms for the remaining three years; therefore, it may look to find a new business to assign the lease to.
A few further common examples of why a tenant may wish to assign their lease are that:
- The tenant may have agreed to sell their business and this requires the lease to be assigned to the purchasers;
- The tenant’s business may not be trading as well as hoped and they are unable to keep up with rent payments;
- The tenant may have won a contract in a different part of the country and may wish to relocate the business; or
- The tenant’s business has grown faster than anticipated and requires bigger premises from which to trade.
Is a licence to assign needed?
A licence to assign is a document used to evidence that the landlord has granted its consent to an assignment.
Whether the landlord’s consent to an assignment (by way of a licence to assign) is required wholly depends on the terms of the lease in question.
If the lease does not include any restriction on assignment, or includes restrictions, but no requirement to obtain the landlord’s consent to an assignment, then no licence to assign will be required.
Most commercial leases, however, will include provisions preventing the tenant from assigning the lease without the landlord’s prior written consent (and, if so, the landlord is under a statutory duty not to unreasonably withhold or delay providing their consent). In this case, a licence to assign will be required and a request for the landlord’s consent should be made as soon as possible in an assignment so as not to delay matters. In order to provide its consent, the landlord may insist on certain things such as the assignee providing a new guarantor or a rent deposit, the rents being fully paid up, or the current tenant guaranteeing the assignee complies with the terms of the lease (this is known as an authorised guarantee agreement). What the landlord is permitted to insist on will depend on the specific wording of the lease and the specific set of circumstances.
If the lease expressly prohibits assignments then the starting point is that they are not permitted. However, this can be overridden by the landlord if it is agreeable to an assignment taking place. If the landlord was agreeable to the assignment, it would be documented by way of a licence to assign. In this scenario, however, the landlord is under no obligation to grant its consent and, as such, is under no obligation to act reasonably or promptly when considering a request to issue a consent.
Actual assignments and virtual assignments
An actual assignment is where a tenant assigns their interest in the lease to an assignee and the assignee in the manner explained above.
A virtual assignment is where a tenant remains liable under the terms of the lease, but enters into a contract with a third-party transferring the economic benefits and burdens of the lease, without actually assigning the lease itself. For example, where a tenant grants a sub-lease it may then enter into a contract (or a virtual assignment) with a third-party transferring the economic benefits and burdens of the lease enabling them to collect the rents from the sub-tenant. If the landlord wished to prevent this sort of arrangement then it would need to include an express prohibition in the lease.
It is also worth noting that if a tenant is a company and the shares in that company are transferred to someone else then the lease would remain unaffected. The tenant would remain the company. Therefore, if the landlord was concerned about a change in shareholding, it would also need to include express provisions in the lease restricting changes in the shareholding of the tenant company.
Registering an assignment
If the lease is registered at the Land Registry, or even if it is not but has more than 7 years remaining, the assignee must register the assignment at the Land Registry. The Land Registry will then process the application and, assuming there are no issues with the application, they will update the title register for the lease so that it is in the assignee’s name.
It is very important that the assignee does indeed register the lease as, until it does, it only has a beneficial interest in the lease, not a legal interest. This has practical implications as, for example, it would not be able to serve a break notice to terminate the lease until it becomes the legal owner (that is, registered at the Land Registry).
Commercial leases also often include an obligation to notify the landlord once an assignment has taken place and to send them a copy of the assignment document and pay them a fee for accepting the notice. Sometimes the lease sets out the specific notice fee, but more often than not the lease merely sets out a minimum fee. Therefore, it is prudent to ask the landlord to confirm the notice fee before completing the assignment.
Renewing a lease after an assignment
Once a lease has been assigned, the assignee becomes the tenant. Therefore, if the parties wanted to renew the lease, it would be for the assignee to agree a renewal lease with the landlord.
If the lease benefits from security of tenure, the assignee as tenant will, at the end of the contractual term of the lease, be entitled to request a new lease on the same or similar terms to the existing lease. The landlord will only be entitled to object on limited statutory grounds and many of those grounds would involve the landlord being required pay the assignee (as tenant) compensation for objecting to a renewal lease. If the lease did not benefit from security of tenure, the landlord would be under no obligation to enter into a renewal lease and it would be down to commercial negotiations between the landlord and assignee (as tenant) as to whether a renewal lease could be agreed.
Assignment v sub-letting
Is it preferable to assign a lease or sub-let (retain your lease but grant a lease of the property for a slightly shorter term to another party)? The answer very much depends on the tenant’s specific requirements and the particular circumstances.
Assigning the lease means that you no longer have any interest in the property. It is quite common that a tenant will still remain ‘on the hook’ for the lease obligations after an assignment, as the landlord will likely have insisted that they enter into an authorised guarantee agreement to guarantee the assignee complies with the lease. However, a landlord will not always insist on an authorised guarantee agreement and, even if one is in place, the obligations on it cease if/when the assignee assigns the lease to another party. Therefore, often tenants view an assignment as the best option where they have no further use or interest in the property and do not think they will do at any point in the future.
By granting a sub-lease, a tenant retains their interest in the lease. This means that they are still liable to pay the rents due under their lease and comply with all of their lease obligations. As the sub-tenant is likely to be in occupation of all or part of the property, careful consideration must be made to ensure that the sub-tenant does not place the tenant in breach of its lease.
A sub-lease is likely to be a preferable option where the tenant has a long lease and is using the sub-lease as an income stream, or where the tenant does not have plans to use the property in the immediate future, but may wish to have the option to use the property further down the line.
Also, for reasons outside the scope of this article, a landlord is extremely unlikely to allow the tenant to assign part only of a lease of property. However, a sub-lease of part of a property is much palatable to a landlord and, as such, a tenant may look to sub-let part of the property if they no longer need to use the full area of the property and need additional income stream.
Assignment by tenant or by landlord?
Throughout this article we have been referring to an assignment of a lease by the tenant. You may have wondered why there is no reference to an assignment of a lease by the landlord. The reason for this is that the landlord is the owner of the interest immediately above the lease in question.
For example, if the freeholder of a building grants a lease, they are the landlord. If they then sell the freehold interest in the building to a new party, that new party then automatically becomes the landlord. The lease hasn’t been assigned and remains between the tenant and the owner of the building, but the owner of the building has changed. This means that the new building owner steps into the shoes of previous building owner as the landlord.