Assigning your lease – what you need to know

Insights - 28/02/2018

There are many reasons why a tenant may wish to terminate its commercial lease early. For example, the tenant may have outgrown its existing premises and be looking to relocate, or, the premises may have become too expensive or too big, making it more appropriate to move to a more suitable, cost effective location.

In such situations, a tenant might look to assign its lease. However, most commercial leases prevent tenants from ‘dealing’ with their lease without first obtaining the landlord’s consent. ‘Dealing’ covers assigning, subletting, charging or otherwise parting with possession with or sharing the property.

Section 19 of the Landlord and Tenant Act 1927 (“LTA 1927”) applies to such clauses and qualifies this covenant so that the landlord’s consent cannot be unreasonably withheld. This section is intended to stop landlords from obstructing tenants from selling or subletting their property without reasonable cause.

Following on from this, the Landlord and Tenant Act 1988 imposes other obligations on the landlord, such as, to give consent in a reasonable time, give reasons for any refusal and pass on the application for consent to any third parties (superior landlords and so on) within a reasonable timeframe.

What is a “reasonable timeframe?”

What this actually means depends on the circumstances but it will generally be measured in days or weeks rather than months. The period may be affected by the actions of the tenant following its application, such as how long it takes to respond to requests for information and whether any attempt is made to communicate particular urgency. If the landlord fails to respond within a reasonable time, the tenant may have an argument to proceed with the assignment without consent.

When is it reasonable to withhold consent?

As with the “reasonable period” issue, the question of when it will be reasonable to withhold consent depends on the facts of the case.  However, there are a number of guiding principles:

  • A landlord can take into account its property interest as a whole, so if the landlord’s building comprises numerous units, it can take into consideration how the new tenant’s business may impact the other occupiers.
  • Consistent disrepair and failure to remedy breaches of the lease may be grounds for refusal.
  • If the proposed assignee is of less financial standing than the existing tenant, and there is a genuine concern that it would be unable to pay the rent under the lease, the landlord may be able to refuse consent for that reason.
  • If the proposed assignee or guarantor becomes insolvent, the landlord is likely to be able to refuse or withdraw consent to assign.• Where If the proposed assignee is a business competitor of the landlord, the landlord may be able to refuse consent.
  • Where a landlord’s reason for refusing consent is to obtain some collateral advantage (for example, by changing the lease terms so as to secure an increase in rent  or a change in the user covenant) a refusal will usually be unreasonable.

It is also important for tenants to bear in mind, that, even if consent is given, the landlord is likely to ask it to enter into an “Authorised Guarantee Agreement” (or AGA). In legal terms, this means the outgoing tenant will be required to guarantee the performance of the lease covenants by the assignee, including payment of the rent. In this way, the outgoing tenant will not escape liability under the lease, even after assignment.

Alternatives

If a landlord delays or refuses consent to assign, a tenant has two options; 1) proceed without consent or; 2) make an application to the court for a declaration that it is entitled to proceed. If a landlord has acted unreasonably or not replied in a reasonable time frame, it is able to proceed with the assignment anyway. However, there is a risk that the tenant may have misjudged the landlord’s refusal which would mean the landlord could then potentially seek damages, an injunction or even forfeiture of the lease. A safer (but more time consuming and potentially expensive) alternative is for the tenant to apply to the court for a declaration on the issue. However, the burden would be on the tenant to prove that the landlord did act unreasonably or delayed unnecessarily.

Conclusion

Although the courts have stated that ‘reasonableness’ should not be too closely defined and should depend on the circumstances of each matter, landlords still need to tread carefully before refusing to give consent to an assignment. Equally, even when tenants feel the landlord has unlawfully refused consent or has not replied in a reasonable timeframe, they should consider the circumstances carefully and seek specialist advice before proceeding with the assignment anyway. Tenants should also bear in mind that they will be responsible for the landlord’s costs, including legal fees and managing agent fees, whether consent is given or not. This can make the whole process expensive and tenants should consider all their options before making an application for consent to assign.

Tenants looking to assign their lease should take the advice of a specialist commercial property solicitor to find out the best way to proceed. To discuss this further or any other commercial property requirements, please contact the Commercial Property Team on 020 8943 1441 or contact one of our specialist commercial solicitors

Other articles from February's newsletter

Disclaimer:

Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.