To grow or react to market conditions your business may need to quickly leave its current premises. If your business rents the premises but there is still time left to run on the lease, what can you do?
A common solution is to transfer your lease to someone else. This process is called ‘assigning a lease’. In this article, we describe how this process operates and what potential problems you may need to overcome. If you need help in this area, our friendly commercial property experts can help.
Jump to:
- How to assign a lease
- When and why to assign a lease
- Is a licence to assign needed to transfer a commercial lease?
- Do you need the landlord’s consent to assign a commercial lease?
- Actual assignments and virtual assignments
- Registering a commercial lease assignment
- The effect of an assignment on a lease
- Assignment v sub-letting
- How much does it cost to assign a commercial lease?
- How long does the lease assignment process typically take?
- Summary
How to assign a lease
‘Assigning’ a lease simply means transferring your lease to another person so that they become the new tenant. Once the assignment has taken place the lease continues to exist and the new tenant becomes liable for all of the tenant’s obligations in the lease.
The first step is to find someone who may want to take over the lease (they are known as ‘the assignee’). Aside from being happy with the rent that is being charged, the assignee will want to review the lease to ensure that it does not contain any onerous or unacceptable terms. This process will be very similar to the one your solicitor carried out when you negotiated the lease in the first place, except that as the assignee will be taking over the existing lease, they will have little or no opportunity to change its terms and will have to be happy with it as it stands.
If the lease contains terms which are generally unacceptable in commercial property leases or terms that will affect the ability of the new tenant to use the property as they wish, you may have problems in assigning the property. It is worth knowing before you start marketing your lease just what it does or does not allow. For example, it is no good marketing a warehouse to factory owners if it specifically forbids industrial use.
Most tenants will want to carry out the same due diligence process as if it were purchasing a commercial property or negotiating the lease at the outset. This usually involves raising queries with the local authority and utility companies as well as finding out about environmental and similar issues. This takes time so do not expect to be able to transfer the lease instantly.
The second step, once an assignee is found and they are happy to take on the lease, is to transfer (‘assign’) the lease. This will be done using a Land Registry form known as a TR1. If the lease is for less than 7 years, then the lease can be assigned by using a deed of assignment. Both these documents have the same effect and will generally be executed by both you as the current tenant and the assignee.
You can assign your lease to whoever and whenever you like. Most landlords are not willing to allow the tenant such freedom and often write into the lease restrictions on to whom a lease can be assigned and on what basis. In most cases, the landlord will be required to consent to the assignment before it can go ahead. This is where most of the practical problems arise as we explore in more detail below.
When and why to assign a lease
A tenant will generally look to assign its lease when it no longer requires use of the property but there is still some time before the lease comes to an end. For example, your business may have taken a five-year lease, but after two years you need to move. Unless the lease includes break clauses, you would have to continue to pay the rent and comply with the lease terms for the remaining three years of the lease term. By assigning the lease you can dispose of or at the very least reduce that liability.
If there is less than a year remaining of the lease to run, it may be more difficult to find someone who wants to take the lease for a short period of time, so in those circumstances, it may be worth continuing to trade from the existing property until the lease comes to an end itself.
A few common examples of why you may wish to assign your lease are that:
- You may have agreed to sell your business and the structure of the transaction requires the lease to be assigned to the purchasers;
- Your business may not be trading as well as you had hoped and you are unable to keep up with rent payments or you may simply need smaller premises;
- You may find that the property is no longer situated in a convenient place and may want to relocate the business; or
- Your business may have grown faster than anticipated and requires bigger premises from which to trade.
Is a licence to assign needed to transfer a commercial lease?
A licence to assign is the document used to evidence that the landlord has granted its consent to an assignment as required. Most landlords are primarily concerned with the income they earn from the properties they rent out. It is important to them that the tenants they rent to:
- Are able to pay the rent in full and on time;
- Keep the property in a good state of repair so that the property can be easily relet when the tenant leaves; and
- Behave in such a way as not to adversely affect the landlord’s ability to rent other properties it may own nearby.
It is for this reason that most landlords will seek to control who you can assign your lease to and prevent you from assigning your lease without your landlord’s consent.
Do you need the landlord’s consent to assign a commercial lease?
Whether your landlord’s consent to an assignment (by way of a licence to assign) is required depends on the terms of the lease you are seeking to assign. Most leases will have some restrictions. It is only if the lease does not include any restriction on assignment or includes restrictions but no requirement to obtain the landlord’s consent to an assignment, that no licence to assign will be required.
Although the detailed provisions can look intimidating, most assignment clauses simply require the landlord to agree that it believes the assignee to be able to meet its obligations and if it does so to formally consent to the assignment. The landlord is also usually required by statute not to unreasonably withhold or delay giving that consent.
Note: if you feel your landlord is not co-operating, you should explore the options for tenants in our article on landlords unreasonably withholding consent.
You should ask for the landlord’s consent as soon as possible so as not to delay matters, as the landlord only has to deal with your request within a reasonable time and even then, only once you have provided all the information the landlord needs to reach its decision on whether or not to give its consent. This may include evidence of your assignee’s good standing such as bank and previous landlord references, and copies of audited accounts and bank statements.
If your proposed assignee is not of sufficient standing to satisfy the landlord consent may be granted if the assignee agrees to provide a guarantor for its liabilities or a rent deposit that can then be used if it fails to pay. What the landlord is permitted to insist on will depend on the specific wording of the lease and the specific set of circumstances.
You should also be aware that most landlords will insist that whatever the financial state of the assignee, you, as the outgoing tenant, will be required to guarantee the assignee’s obligations under the lease by what is called an authorised guarantee agreement. You should not make the error of assuming that by assigning your lease you can just walk away from any responsibility. The one thing that the law requires you to do is to find someone who can pay the rent and comply with the lease terms. If you do not do this, then the landlord will be able to recover any arrears from you.
If your lease expressly prohibits assignments without containing a requirement for consent to be given by the Landlord, then the starting point is that you cannot assign it at all. The landlord may still agree to an assignment taking place. This would still be documented by way of a licence to assign but in this case, the landlord would be under no obligation to grant its consent even if it would be reasonable to do so or to act promptly when considering your request to give that consent.
Actual assignments and virtual assignments
Most transfers of the ownership of a lease are carried out by an ‘actual assignment’ where the tenant assigns its interest in the lease to an assignee as explained above.
In a few cases you may seek to use a virtual assignment whereby you remain liable under the terms of the lease, but enter into a contract with a third-party transferring the economic benefits and burdens of the lease, without actually assigning the lease itself. These can be used when the lease contains overly restrictive assignment clauses. You could, for example, declare a trust or enter into a contract in favour of a third-party, effectively transferring the economic benefits and burdens of the lease to them. Beware of clauses in the lease which prevent this sort of arrangement.
If a tenant is a company and the shares in that company are transferred to someone else, then the lease would remain unaffected and the tenant would still be the company. Although not strictly a virtual assignment this change of ownership can be a concern to some landlords and as a result, some leases include express provisions restricting changes in the shareholding of the tenant company.
Registering a commercial lease assignment
If the lease is registered at the Land Registry or has more than 7 years of its term remaining, and you are the assignee, you must register the assignment at the Land Registry. The Land Registry will then process the application and update the title register for the lease so that it is in your name.
The assignee must register the lease as, until it does, the assignment is not fully complete and legally you have not yet become the tenant. This has practical implications as, depending on the wording of the lease, you may not be able to serve a valid break notice until it is registered at the Land Registry. As registration can in some circumstances take a long time, you may find yourself unable to end the lease when you expected. If you forget to register you are unlikely to complete your registration in time to take the steps you need to take.
If you do not apply for registration within 2 months of the date of completion of the lease, the lease becomes void and can only be registered if the Land Registrar agrees to make an order extending the 2 month period.
In addition to registering the lease with the Land Registry most leases include an obligation to notify the landlord that an assignment has taken place and to send them a copy of the assignment document and pay them a fee for noting the transaction. Sometimes the lease sets out the specific notice fee, but often the lease merely sets out a minimum fee. In that case, you should ask the landlord to confirm the notice fee before completing the assignment.
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The effect of an assignment on a lease
Once a lease has been assigned, the assignee steps into the shoes of the tenant and all the rights and duties that the previous tenant had passed over to the new tenant. Occasionally there are rights in the lease which are personal to the original tenant. This often affects the break clause. If the right to end the lease early is personal to the original tenant, you cannot do so if the lease is assigned.
As most leases require the previous tenant to guarantee the performance of the new tenant, the assignment also has the effect of rearranging the liabilities for payment of the rent. Any previous guarantor under an authorised guarantee agreement will have been automatically released by the assignment and rent deposits may become repayable by the landlord.
Assignment v sub-letting
Is it better to assign a lease or sub-let it? The answer very much depends on your specific requirements and circumstances.
Assigning the lease means that you no longer have any interest in the property. It is quite common that a tenant will still remain ‘on the hook’ for the lease obligations after an assignment, as the landlord will likely have insisted that they enter into an authorised guarantee agreement to guarantee the assignee complies with the lease. A landlord will not always insist on an authorised guarantee agreement and, even if one is in place, the obligations on it cease if/when the assignee assigns the lease itself to another party. Most tenants regard an assignment as the best option where they have no current use or interest in the property and do not think they will do so at any point in the future.
You may have to keep the lease in your name if you wish to rely on any personal rights in the lease by granting a sub-lease. This will allow you to retain your interest in the lease, but it also means that you are still liable to pay the rent due under the lease and comply with all of the lease obligations. As the sub-tenant is likely to be in occupation of all or part of the property, you must manage them to ensure that the sub-tenant does not place you in breach of your duties under the lease.
Other reasons for sub-letting include:
- Using the sub-lease as an income stream.
- If you think you may wish to use the property later.
- If you want to dispose of only part of the property and keep the rest for your own use (most landlords are extremely unlikely to allow you to assign part only of your lease).
How much does it cost to assign a commercial lease?
Assigning a commercial lease typically involves various costs that both the assigning tenant and assignee need to consider. Some of the common costs associated with assigning a commercial lease in the UK may include:
- Legal Fees: Engaging a solicitor to assist with the assignment process, review the lease agreement, draft the assignment documentation, and negotiate terms with the landlord can incur legal fees. Usually, the assignor and assignee bear their own legal costs for the transaction. The total fees can vary on a lease by lease basis, but often cost somewhere between £800 to £1,500 plus VAT for a complete service depending on the complexity.
- Landlord's Costs: The landlord usually charges its legal fees for processing the assignment, as well as administrative costs and any costs associated with reviewing the assignee's financial standing to provide its consent to the assignment. Depending on market conditions and bargaining strength, the incoming tenant/assignee usually pays the landlord’s legal fees but parties can choose to split the costs between them.
- Fulfilling lease obligations: Where such conditions are attached to the landlord providing his consent, this could mean anything from ensuring rent payments are up to date, to carrying out any repairs or maintenance deemed necessary, particularly if dilapidations are present.
- Surveyor's Fees: If a surveyor is engaged to assess the property's condition or value, the surveyor's fees may apply.
- Premium: depending on market conditions, if the rent payable under the lease is higher than the average current rate - the incoming tenant or assignee may negotiate that the current tenant pays them a premium to account for the difference.
- EPC: If this certificate has expired, the assignor will likely need to cover the costs of obtaining a new one to market the property.
- Costs for the assignor: If the assignment involves the payment of a premium or consideration, SDLT may be payable by the new incoming tenant based on the value of the premium or consideration. Other costs the assignee may need to factor into account include any security deposits required by the landlord, advance rent or Land Registry fees.
It is essential for both parties involved in the lease assignment to budget for these costs and factor them into their financial planning.
How long does the lease assignment process typically take?
The timeline for assigning a commercial lease can range from weeks to several months, depending on the complexity of the lease, the speed at which landlord consent is obtained, as well as the overall responsiveness of third-party solicitors in agreeing the paperwork. If the landlord is slow to provide consent to assign, or identifies repair works or other obligations to be fulfilled under the lease before agreeing to the assignment, the process will naturally take longer. To avoid potential delays, current tenants should seek to make enquiries with their landlord well in advance of their desired assignment date, and ensure they are up to date with their lease terms.
Summary
The process of assigning a lease can be complex and comes with legal implications for all parties involved. Whether you are a landlord, current tenant or incoming tenant, it is crucial to consult legal experts to help you navigate the process effectively and protect your interests in the commercial property transaction. Planning ahead and allowing plenty of time to obtain the landlord’s consent, negotiate the paperwork and ensuring lease terms are complied with can lead to a smoother successful transaction. If you have any questions about assigning a commercial lease, our friendly team of commercial property solicitors at Harper James are here to help.
