Tenants of commercial premises who want to dispose of their premises will have to obtain their landlords’ consent if they want to transfer (or ‘assign’) the lease to someone else. This also applies to under-letting or sub-letting.
Some leases contain an absolute bar on assignment, underletting or sub-letting. In this case the landlord may still be prepared to give consent but is entitled to refuse it.
Obtaining landlord’s consent may seem a simple matter but it can never be regarded as a mere formality. Failing to obtain the landlord’s consent when it is required can lead to severe financial penalties. Consent should always be recorded in a formal document to avoid arguments.
In view of the legal problems which can arise it is preferable to obtain advice from a solicitor before proceeding.
If premises are assigned without consent the landlord may not recognise the new tenant at all and continue to hold the original tenant liable for the rent and all other provisions of the lease (including any breaches of covenant by the transferee.)
Sub-letting or underletting of the whole or part of the premises is often completely barred but may be permitted with landlord’s consent. Leases are more likely to allow under- or sub-letting of part of premises (with consent) if they can be easily sub-divided, such as an individual floor forming part of a larger office block.
Commercial leases generally bar parting with possession of the whole or any part of the premises, i.e. letting someone else use the whole or part of the property on an informal basis.
If a business is being sold as a going concern which includes the lease of premises then the landlord’s consent to the transfer will still be required.
Applying for the landlord’s consent
An application for consent to assign should usually be sent to the landlord or its agents. It must be served in accordance with any provisions in the lease regarding service of notices, or otherwise in accordance with the Landlord and Tenant Act 1927. (It is advisable to get a solicitor’s advice on this, as the landlord could ignore a notice that is not correctly served.)
The tenant will be liable for the landlord’s costs whether or not the application is approved (although it may be possible to get the assignee to pay if the assignment is completed).
While the landlord is now under a statutory duty to deal with applications within a reasonable time it is entitled to ask for further documentation or information in respect of the potential tenant in order to make a decision.
It is usual for landlords to request three years audited accounts for the proposed assignee/undertenant together with up to date management accounts and references from professional advisors and trade references. A reference from an existing landlord of other premises for the payment of the rent and compliance with the lease terms may also be required.
Landlords can refuse consent if the proposed new tenant cannot provide good references or has no previous trading history.
Can the landlord refuse consent?
Most leases will say that the landlord cannot “unreasonably” withhold consent, but 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 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.
However the landlord may give consent subject to conditions (but any conditions must themselves be reasonable.)
Of course the tenant may not agree with the landlords reasons if consent is withheld. If the landlord cannot be persuaded to change its mind then it is possible to challenge the decision in the courts, but this can be difficult and expensive.
What is a “reasonable” ground for the landlord to withhold consent?
There is a substantial body of case law as to what is or is not “reasonable” in this context, so advice from a solicitor is desirable.
Under the 1988 Act it is 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. (e.g. if there is an existing breach of covenant or new tenant is will clearly be using the premises for a type of business which is not permitted by the lease.)
Even if consent is given the original tenant will probably be required to enter into an “Authorised Guarantee Agreement” (or AGA) with the landlord. Modern leases are likely to include a provision requiring an AGA as a pre-condition to any assignment.
An AGA means that the outgoing tenant guarantees the performance of the covenants in the lease by the person or company to whom the lease is being transferred. So if the new tenant fails to pay the rent or is in breach of any other covenants and provisions in the lease the landlord can force the original tenant to pay the rent or remedy the breach of covenant.
This imposes a substantial potential liability on someone wanting to assign a lease so they should satisfy themselves as far as possible that the proposed assignee is going to be a good tenant.
Consent may also be subject to the assignee obtaining a guarantor and/or entering into a rent deposit deed, to give the landlord further security for payment of the rent.
Completing the Licence to Assign, and what to do if consent is refused
If the landlord agrees to give consent this is usually recorded in a formal document known as a Licence to Assign. This will be prepared by the landlord’s solicitor or agents and the formal transfer of the lease to the new tenant should not be completed until the landlord has signed this Licence.
The landlord might refuse consent outright, or give reasons which the tenant considers unreasonable, or impose unacceptable condition. The landlord might also fail to respond to an application within a reasonable time.
In such cases the tenant will have to consider making an application to court for a declaration that the landlord is acting unreasonably and/or damages for breach of statutory duty.
The alternative would be to go ahead with the transfer of the lease and then argue the case with the landlord should it contest the lawfulness of the assignment.
Either way could involve substantial costs, especially if the tenant loses a court case.
So expert legal advice should always be obtained when planning to dispose of any commercial lease.