There are a number of reasons why you might consider taking over an existing business lease. There may be more flexibility with regards to the length of the lease term or you may be in a strong negotiating position if the current tenant is looking to exit their lease quickly. As such, it is advisable to try and find out about the circumstances of the current tenant as this will put you in better position. Also, depending upon how closely the existing business matches your own plans, you may be able to make use of alterations made by the existing tenant. Tenants of commercial premises who want to transfer a commercial lease to a new owner will have to obtain their landlords’ consent.
Transferring a lease (also known as assigning a lease) can only work if the landlord agrees with the tenant’s intention to transfer the lease to someone else. An assignment of a lease is not always permitted. In some cases, a landlord may refuse for various reasons or may not agree to have the property utilised in certain ways. However, depending on the circumstances, the landlord may be prepared to negotiate a compromise. In this article, taking over existing business lease, we take a look at the process and mechanism involved.
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What are the steps involved in taking over an existing lease?
Firstly, you are effectively stepping into the shoes of the old tenant and will be taking over all their liabilities concerning the lease. This may include rent arrears and disrepair in the property which you would need to address. For example, if the previous tenant has gone out of business then these liabilities can be substantial. The landlord may even insist these issues are rectified before you take on the lease, although depending on the wording in the lease, they might not be entitled to insist on this.
It is likely that the lease will state that you must obtain the landlord’s consent to take on the lease, otherwise the transfer (assignment) may not be valid. A licence to assign the lease will be prepared by the landlord’s solicitors and sent to you and the previous tenant for signing.
Leases taken on by the previous tenant after 1 January 1996 are likely to contain a provision that requires the tenant to sign an Authorised Guarantee Agreement. This would be drafted by the landlord’s solicitor and requires the original tenant to guarantee your performance under the lease. The original tenant is likely to want to resist this and require you to provide your own guarantor instead – if the landlord will accept this.
The new tenant is likely to need to demonstrate to the landlord that they are capable of keeping up with rental payments and this will probably take the form of providing trade and banking references.
You must check the terms of the lease carefully and also ask for copies of ancillary documents that may have been agreed varying or adding to the tenant’s responsibilities. You may also need to sign a Rent Deposit Deed if a rent deposit is payable for the lease.
Also, if there are more than seven years remaining on the term of the lease then you must register this at the Land Registry in order for it to be legally binding.
Assigning the lease
The lease may give a tenant the right to assign the lease or sub-let to another tenant. If the lease allows this, this may be with or without restrictions. It may also be possible to retrospectively negotiate these rights with the landlord for a fee. In general terms, the shorter the lease, the easier it should be to get out of. It may be possible to negotiate a deal with the landlord by paying him or her some or all of the outstanding rent.
Assigning a lease (passing it on to another business) is a half-way step between terminating the lease and sub-letting. Short leases often prohibit assignment of the lease. It may also be prohibited in the last few years of a lease. Even if assignment is permitted, the lease will restrict who the new tenant can be and you are likely to need the landlord’s consent, although this cannot be unreasonably withheld. One of the fundamental considerations relates to the strength of the covenant of the incoming tenant. The landlord will usually want to check the prospective tenant’s accounts and references. The landlord will also want to know how the new tenant will use the premises, and to be told of any planned alterations. The permitted use of the premises may be restricted in a way that disqualifies the proposed new tenant.
Although the new tenant (assignee) is liable to the landlord to fulfil the terms of the lease, the original tenant may be left with some liabilities and this will usually include guaranteeing payments from the new tenant. For leases beginning before 1 January 1996, the original tenant remains liable to the landlord for all payments owed by any subsequent tenants, throughout the full period of the lease. This is in accordance with ‘Privity of Contract’ law. For leases beginning after 1 January 1996, the landlord will usually be entitled to require the tenant to guarantee payments by the next tenant (but not all subsequent tenants), failing which the landlord may be entitled to refuse to let the original tenant assign the lease.
What checks will the landlord make before allowing the transfer of the lease?
Before consenting to the assignment of a lease to a new tenant, the landlord will want to carry out checks to ensure the proposed tenant is a suitable replacement. These checks can include:
- Financial status: your landlord will want to see evidence that the new tenant is in a strong financial position
- References: statements from previous landlords that the tenant has leased property from will be required to show that the tenant is reliable and doesn’t have a history of missing payments or otherwise neglecting their responsibilities as a tenant
- Proposed use of the premises: your landlord will probably be looking for a new tenant to intend to use the premises in broadly the same way as you have done in the past as the lease will specify what use is allowed.
- Likelihood of requesting alterations to the building: as above, your landlord will require advanced notice of any alterations the new tenant may wish to make to the premises, and in some cases written permission in the form of a Licence to Alter will be required. It is likely that they may withhold their consent for assigning the lease to any tenant intending to make large-scale changes depending upon the type of premises involved.
Can the landlord refuse consent?
Most leases will state that the landlord cannot “unreasonably” withhold consent. However, in any case a proviso to the effect that consent is not to be unreasonably withheld will be implied by the Landlord and Tenant Act 1927.
The Landlord and Tenant Act 1988 also states that a landlord owes a duty to the tenant to give consent except in a case where it is reasonable not to give consent. The landlord may give consent subject to conditions.
The landlord is also under a duty to deal with an application within a reasonable time and must give the tenant written notice of his decision whether or not to give consent. If the consent is withheld the landlord must specify its reasons for withholding it.
It is considered reasonable for a landlord to withhold consent to a proposed transaction in cases where, if they withheld consent and the assignment was completed, the tenants would be in breach of covenant
How we can help
We have a proven track record of helping clients deal with the transfer of commercial leases. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting. You can read more about the range of commercial property services we offer by clicking here: https://blackstonesolicitorsltd.co.uk/commercial-property-services/
How to Contact Our Commercial Property Solicitors
It is important for you to be well informed about the issues and possible implications of buying, selling or leasing commercial property. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Commercial Property solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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