What is an Assignment of a lease?
When you buy or are granted a lease, you take ownership and possession of the property for a fixed period of time, which is known as the term of the lease. You might take a ten-year lease, knowing that you might only want the property for a few years, and then want to move on as your business grows, but the landlord won’t grant a lease for a shorter period. This might not put you off taking the lease, as you can sell the remainder of the lease on, under certain criteria. This is known as assigning a lease, and we’ve set out below more detail of how this works.
So, in legal terms, the assignment of a lease is a process whereby all rights that have previously been possessed over a property are transferred from one party to another. It’s not unlike selling a house, but there’s a bit more paperwork involved! In particular, the outgoing lessee, the new lessee, and the landlord will all need to enter into a document known as a licence to assign.
There are various requirements that need to be satisfied before the current lessee can be released from the lease and the obligations under the lease are transferred to the new lessee under the Licence. The lease will usually set out what the Landlord’s criteria is before an assignment is possible, but we’ve set out below the most common requirements.
What criteria must be met?
Most of the time this would require similar checks to the ones carried out on the original tenant when the lease was first granted. These might include
- Financial checks. The landlord will want to know that the new tenant is going to be able to pay the rent. If not, they may ask for personal guarantees, or make the outgoing tenant continue to have some liability.
- Although a landlord’s main requirement is that their tenants can pay the rent, they may also want to know that they are complaint people, not likely to break the terms of the lease, cause a disturbance or upset other tenants. The landlord may, for example, ask for references from a previous landlord as to the tenant’s good character.
- Restrictions on activity. The landlord may restrict what business a new tenant can engage in. For example, if the landlord is a shopping centre, and the outgoing tenant sells men’s’ clothes, they’ll probably have no objection in the new tenant selling men’s clothes, but they might object to the premises being taken over by a business selling women’s clothes, if they feel they already have enough tenants in that line of business. Or they might only want tenants who sell high-end products.
Duties placed on the Landlord
Most modern leases will include a requirement that any consents required by the landlord must not be unreasonably withheld or delayed. If the tenant requests a licence to assign a lease, which the landlord either refuses without good reason, or takes a very long time to consent to, the tenant can take action, such as going to court for a declaration that the landlord is in breach of the lease. However this is a very major step to take, and we’d always encourage clients to do everything they can to reach an agreement without court action being necessary.
Not all leases will include an express provision requiring the landlord to give consent fairly and promptly. If that’s the case, it can be much harder and possibly more expensive but never impossible to do an assignment.
Can a landlord object to the assignment of a lease?
As we’ve set out above, if the lease includes a provision that consent to an assignment should not be unreasonable refused or delayed, any landlord who fails to comply is in breach of lease. This could result not just in court action but costs and possibly damages to the tenant.
However, it should be remembered that the right to assign the lease is generally subject to permission of the landlord being granted. So, a tenant should not assign the lease to a new party until a licence to assign has been properly executed. If he does, the landlord could apply for an injunction to prevent the letting, which could end with the tenant having to pay costs and damages to the landlord. Alternatively, the landlord could seek forfeiture of the lease, which could have far more significant consequences for the tenant.
When will it be sufficiently reasonable for a landlord to withhold consent?
Although this will always depend on the circumstances of the lease, here are some guidelines as to the types of situation when a landlord may be justified in refusing to agree to an assignment of a lease:
- Insufficient information supplied in respect of the new tenant. This would mean that the Landlord is unable to make a judgment on the proposed tenant. It will usually be for the tenants (old and new) to satisfy the landlord that the new tenant is a good fit.
- Character and financial standing of the assignee
- The landlord has decided that the future viability of the building as a whole could be at risk, such as if he feels the new tenant would damage the reputation of the area or be detrimental to other tenants
When will it be sufficiently unreasonable for a landlord to withhold consent?
Again, this will depend on the facts of the case, but generally, it is likely to be held to be unreasonable for a landlord to withhold consent on the following grounds
- Issues that are not covered by the lease. So, for example, if the lease doesn’t require a new tenant to prove that they are of good standing, it might be unreasonable for the landlord to try to imply this into the assignment process.
- The landlord makes an argument that the tenant will have a lasting effect on the lettings of the other properties in the vicinity, except other properties owned by the landlord.
- The landlord wants repossession of the property.
- The landlord wants to withhold consent on the grounds of race, sex or disability. So if the outgoing tenant’s target audience was heterosexual men, but the incoming tenant’s target audience is homosexual men, this alone is unlikely to be a good enough reason.
Assigning a Sub-lease
A sub-lease is where a tenant has sublet the property or part of it to a third party. Sometimes that third party may want to assign the sub-lease to a new tenant. If so, not only will the landlord’ consent be required, but also that of the tenant who granted the sub-lease.
Knowing the difference between assigned lease and a sublease
Knowing the difference between an assigned lease and a sublease could help you make the right decision when choosing which route to take. Although both achieve the same result, an assignment of a lease is distinctively different to a sub-lease.
An assignment of a lease is a complete transfer of the right to be the tenant under the lease. The third-party (or new tenant) becomes the “tenant” under the lease, taking over all of the leased premises, substituting for the old tenant. The new tenant, therefore, pays the rent due under the lease directly to the landlord and is responsible for all aspects of complying with the lease.
As we have explained above, a sub-lease is an entirely new lease between the tenant and a third party as sublessee for the premises or sometimes for a part of the premises. The original lease between the tenant and the landlord remains in place and is unaffected by the sub-lease. This results in the original tenant remaining liable for all the obligations of the original lease, whilst collecting rent from the subtenant.
If you own a lease and you are considering selling it, or you’re thinking about buying an existing lease, then hopefully this will give you enough information to consider your options, but we’d be very happy to talk to you about this further before you make any final decisions.
Disclaimer – our articles are designed to give you guidance and information. There is no substitute for proper direct advice, particularly as everyone’s circumstances are different. If anything in this article may affect you, please contact us for advice that is specific to your circumstances.