Lease assignment quick guide
Tue 26 September 2023
Lease assignment guide and key legal issues
Despite a trend towards shorter leases which offer more flexibility for tenants, with leases of industrial units, offices and shops, Landlords still commonly push for a lease term of 5 years or more. With longer leases, the tenant will quite commonly want to transfer the lease to a wiling replacement tenant. This is known legally as a lease assignment. This is a not a straightforward or risk free process, almost always requiring the Landlord's consent first and a significant legal process which takes time and can be expensive.
If you need experienced and efficient solicitors to advise you an a commercial lease assignment, whether as landlord, tenant or potential assignee, please get in contact. We have specialist lawyers in over 30 offices around England & Wales and have 1 of the UK's busiest and fastest growing property law teams.
Is assignment of the lease the best option?
The most common alternative is that the Landlord agrees that the tenant can surrender the lease. There are complications with this for the tenant, who will probably need to pay dilapidations and possibly even a premium to the Landlord.
A prospective new tenant may also prefer to negotiate a new lease with the Landlord.
Another alternative to assigning a lease, more common with a 10 year lease, is that the lease has a break clause and the tenant may be able to terminate the lease using this. Where a lease contains a break clause, the procedure is normally very strict and the tenant must usually be in full compliance with the lease and this often means significant expense for the tenant especially in satisfying the Landlord in relation to repair covenants and reinstating any alterations made.
Consent to assignment – the licence to assign
If assignment is the preferred or only viable option, the first step, once a deal is in place between the current tenant and the proposed tenant to take over the ;lease, is to check the lease allows assignment. Most commercial leases do, but require Landlord’s consent to assignment (in the formal of a formal licence to assign), with consent not being unreasonably withheld.
The Landlord will look at the proposed assignee’s financial credibility and reputation before deciding whether to consent. Where consent is given, this needs to be formalised in a licence to assign.
Assignment risks for existing tenant
As seen above, there are complications and costs whichever option a tenant might explore to get out of a lease. The main risk with a lease assignment is based on the Authorised Guarantee Agreement ("AGA"). Almost all commercial leases have an Authorised Guarantee clause whereby, on assignment, the outgoing tenant continues to guarantee the tenant’s obligations of the tenant they assign to (but not any subsequent tenant). This is a significant risk and so it is important to try and negotiate some form of comfort when assigning. Possibilities include some form of deposit from the assignee.
Risks of taking over an existing lease
The risks include :-
- You will be taking on the existing terms of the lease which may be very advantageous to the Landlord and these cannot be changed. You should be especially wary of a Full Repair and Insure (FRI) lease.
- Repair and condition is a big risk. At the end off the lease, it is common for the tenant to have to spend significant sums on repair and/or reinstatement. This can run into tens of thousands of pounds and sometimes more and dilapidations disputes are common. Check whether there is an agreed schedule of condition from the start of the lease, seek to agree a new one potentially at the time you take over and potentially negotiate some payment or deposited amount from the outgoing tenant towards dilapidations.
- Reinstating alterations – if the premises have been altered, you would need to restore the premises to the way they were when the lease started.
In summary, you should ensure your lawyers carry out suitable enquiries and potentially seek to negotiate with both the Landlord and existing tenant before agreeing the assignment.
What does a lease assignment cost and who pays?
It’s pretty much a certainty that the Landlord will insist on his/her/their costs related to assignment being paid. Whether the assignor or assignee pay or split the Landlord’s fees is generally negotiable. The likely costs of the Landlord can be as much as £2,000.00 plus vat taking into account legal and other fees.