How to ‘get out’ of a Lease – Assignment


Author: Zevi Prager


A lot of time, energy and concentration is spent by tenants settling heads of terms and negotiating the lease when they first look to take a new lease. But, as the needs of tenants vary and change throughout their lifecycle, tenants often need to adapt the property they are trading from. They need increasing flexibility from their leases and properties to be able to run their business as efficiently and seamlessly as possible.

In this article we will be looking at possible ways that a tenant may consider adapting their properties to meet changing business needs, whilst staying within the agreed terms of the lease.

Many tenants will have experienced the situation where they have taken a lease of a property but subsequently discover that the property has not been profitable. They are therefore left with the rent, service charge, insurance, rates, utilities, staff, etc. to pay but with sales and/or profits insufficient to cover these costs.  In order to ‘get out’ of the lease there are several options which a tenant can take.  One option is to assign the lease.

How does this work?

An assignment of a lease is effectively selling the lease to a third party known as an assignee. The assignee will then take your place as the tenant and they will be responsible for complying with all of the tenant’s obligations in the lease.  The assignment will usually be dealt with by way of a licence from the landlord consenting to the assignment and a transfer deed.  You may need to instruct agents to find an interested buyer/assignee for the lease.  A proposed assignee is likely to be interested in either the location or in taking over the business which you have been carrying out.  As you would expect, assigning a lease is not a quick solution and can take several months as there are several parties involved (as well as their solicitors and agents).  If there is a business sale, then this will be much more complicated than a simple assignment of the lease.

Check the lease

Before going to an agent, you will need to check the provisions of the lease to see what terms and conditions are required to assign the lease, including if the lease prohibits assignments. You will need to review the lease provisions and consider if they are overly onerous, making assigning the lease difficult or impossible.

To assign the lease you will usually need to obtain the landlord’s consent; there are statutory provisions preventing the landlord from unreasonably withholding or delaying consent.

The main terms and conditions which are likely to be in a lease and which you may need to consider are:

  1. Assignments of part of the property are almost always prohibited.
  2. All arrears must usually have been paid before the landlord will allow the tenant to assign.
  3. A proposed assignee must be of sufficient financial standing to be able to afford to take on the lease obligations. The landlord will often want to see references from the assignee evidencing this.
  4. Whether a guarantee (known as an authorised guarantee agreement) may be required from you as the seller of the lease.
  5. The landlord may also require the proposed assignee to provide a rent deposit.

Fees

A tenant assigning their lease will be responsible for the landlord’s solicitor’s fees as well as any other professional fees. Often the lease will say that the landlord’s professional fees must be reasonable, but this is not always the case.  The landlord will require the tenant’s solicitor to provide an undertaking for its professional fees before considering a request to assign the lease.  You will also have to pay your own solicitor’s fees as well as the agent’s fees.  If there is a superior landlord, their professional fees will also fall to you to pay.

Other points to consider

You will also need to consider the permitted use of the lease. If the lease only allows you to use the property for a specific use, and no change of use is allowed, it may be difficult finding an assignee who wants to carry out the same business as you have been carrying out at the property.

You should also consider if a rent review is due as a potential assignee will want to know what rent they will be taking on and not have any upcoming uncertainty.

Conclusion

An assignment is a simple way of selling the lease so that you can walk away from the payments and fees which are being demanded by the landlord. However, there will be costs to pay and it can be a slow process.  It would be advisable to contact your solicitor at the outset to go through any potential pitfalls and considerations.  Although you are selling the lease you may also remain “on the hook” afterwards, depending on the age of the lease and whether you have to enter into an authorised guarantee agreement or not.

Zevi Prager, Associate, Fladgate LLP (zprager@fladgate.com)

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