19 February 2020

Assignment of a Commercial Lease

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An assignment is a transfer of an existing lease by the current tenant to a new tenant.

The old tenant who wishes to transfer the lease is called the Assignor and the new person who wishes to get the remainder of the lease is called an Assignee. The Landlord remains the same. The existing lease will be passed or transferred to the Assignee. Most commercial leases forbid the tenant to assign the lease without first obtaining the landlord’s consent

Once the heads of terms have been agreed and drawn each party will instruct their own solicitors. The Assignor will instruct his own solicitors that he wishes to assign the lease. The Assignee will instruct his own solicitors that he wishes to buy that lease. The Landlord will instruct his own solicitors to act on their behalf in relation to the consent. The Assignor’s solicitors will contact the Landlord’s solicitors requesting the Landlord’s consent for the assignment.

The Assignor and the Assignee will need to decide and agree who will be responsible for the Landlord’s legal costs in obtaining the consent.

Before giving its consent, the Landlord will request the Assignor to provide satisfactory references for the Assignee. These are usually bank and trade references confirming that the proposed assignee is solvent and capable of paying the rent on the lease.

Upon receipt of satisfactory references and confirmation from the Landlord that he is willing to grant consent to the assignment, the Landlord’s solicitors will draft the following documents:

  1. Licence to Assign: A Licence to Assign is a document that enables the Assignor to transfer the lease to the Assignee with the Landlord’s permission. All three parties i.e. Assignor, Assignee and Landlord will sign this document.
  2. Rent Deposit Deed: A Landlord will usually require a rent deposit as a precondition to providing its consent to an assignment of the lease. The rent deposit is a sum of money which will be provided by the Assignee (who will become the new tenant) to the Landlord as security for payment of the rent and performance of the tenant’s covenants in the lease. A rent deposit is usually demanded by landlords as it is an immediately accessible source of money that can be withdrawn as soon as the tenant is in breach of a relevant covenant in the lease.
  3. Authorised Guarantee Agreement: An Authorised Guarantee Agreement is a legal document where the Assignor guarantees the performance, of the Assignee, of the covenants from which the Assignor has been released. In the event that the Assignee is in breach of any of the lease covenants, the Assignor agrees to bear the burden. This is a very important legal document which merits its own article.

Can the landlord refuse consent to an Assignment?

Most leases will say that the Landlord cannot “unreasonably” withhold consent.

According to section 19 (1A) of the Landlord and Tenant Act 1927 the landlord can insert conditions in the lease, which need to be met in the case of an assignment.  If these conditions are not met, the landlord’s refusal to assign the lease will be deemed reasonable. The landlord could, for example, require the prospective assignee to be of sufficient financial standing to comply with the covenants of the lease.

The landlord is also under a duty to deal with an application for assignment 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.

If the landlord cannot be persuaded to change its mind, it is possible to challenge the decision in Court, but this can be difficult and expensive.

If premises are assigned without the landlord’s consent, the landlord may not recognise the new tenant i.e. the Assignee and continue to hold the original tenant i.e. the Assignor liable for the rent and all other provisions of the lease including any breaches of the lease covenant by the Assignee.

For advice on a lease assignment, please contact our Property team.

For further information please contact Kiran Walia on k.walia@connaughtlaw.com

Disclaimer:

The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. Connaught Law and authors accept no responsibility for loss which may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please don’t hesitate to contact Connaught Law. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of Connaught Law.

About the Author

Kiran Walia
Kiran is a senior associate in the real estate/property department. She has over 17 years’ experience in dealing with all aspects of a residential and commercial property.

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