Tenants of commercial premises who want to transfer a commercial lease to someone else will have to obtain their landlords’ consent. There are a number of reasons a tenant may want to do this. Perhaps your current premises are no longer suitable for the needs of your growing business, or perhaps your business is in financial difficulty and you need to find a lease with more favourable terms.
Transferring a lease (also known as assigning a lease) can only work if your landlord agrees with your 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, your landlord may be prepared to negotiate a compromise. In this article, transferring a commercial lease to someone else, we take a look at the process and mechanism involved.
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How easy is it to get out of a commercial lease?
In recent years, leases have tended to become shorter with more flexible terms. There has been a general shift in focus of a lease in favour of the tenant. However, it should be remembered that a standard or institutional lease is still challenging for a tenant to get out of. These leases usually run for between 12 to 25 years and have strict legal restrictions. One of the reasons for this is because the property can be traded, with its investment value being affected by the terms of the lease. The ability of a tenant to get out of a lease depends on the terms of the lease, the state of the property market at the time and other negotiating factors.
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
Is there anything else to consider?
The costs incurred in getting out of a commercial lease may be substantial. It is important to be realistic about the price a tenant will have to pay. Do not ignore the cost of the professional advisers involved, on both sides and be mindful that the bills for the landlord’s advisers will usually be paid by the tenant. Other things to consider are the cost of finding a new tenant, the extent of tenant liability under the lease for dilapidation charges and the cost of finding new premises and relocating.
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.