Premium for Commercial Lease Assignment

[MRB]

Hi,

I'm considering taking an assignment of a commercial lease. I have two questions of procedure/market practice:

(a) the property has a below-market rent (but with a rent review in 3 years). The assignor spent a large sum on renovations and improvements when he took on the property a short time ago which is presumably why he was able to negotiate a low rent at that time. The assignor is now requiring a large premium in recognition of his expenditure and the low rent. The premium basically wipes out the benefit of the low rent AND causes cashflow concerns to my start up business.

Is it usual in such circumstances for the assignor to be able to pass on nearly all the cost of the improvements he made/demand a significant premium for such a limited period of guaranteed low rent? Is it usual to take into account limitations in the lease when negotiating a premium (e.g. limited "use" clause; some other ideal tenant protections missing)?

(b) the second question relates to procedure. Is it normal to first approach the assignor/his agent with an offer for the premium that is subject to the subsequent discussions with the landlord? I don't want to commit to the premium before I find out whether the landlord will want to use his right to request deposit/personal guarantees.

Any thoughts at all would be very welcome.

Best regards
MRB

[Editor]

Everything is negotiable with the assignment, so what you agree to pay by way of a premium should reflect the financial situation.
You are taking over the rights and responsibilities of the existing tenant, so the landlord cannot then ask you for more security than he has already from the existing tenant by way of guarantees.
You say the existing tenant is on a low rent and has agreed to repairs in respect of this.
First and most importantly you need to satisfy yourself as to any agreement with the landlord on this: what was the condition originally, is there a schedule of condition and what is the condition now? How satisfactory are the repairs to date? This may mean a survey on the property. All of this is important to avoid being caught out with a schedule of dilipadations at the end of the short term left on this lease.
Yes, you do need to take account of limitation on use: generally the more limited the use, the lower will be the open market rent. You also need to be sure the user clause allows your own use. Likewise missing the tenant protections.
You could agree a deal with the tenant and the assignment could go through without reasonable objections by the landlord. However, I would say, in this situation you need to clarify and agree in writing the other issues with the landlord first.

[Tax Accountant]

You are taking over the rights and responsibilities of the existing tenant, so the landlord cannot then ask you for more security than he has already from the existing tenant by way of guarantees.


I am not too sure if the above comments are correct.

The lease assignment would normally need to be approved by the landlord. However, the landlord cannot refuse the assignment unreasonably. But if the lease is proposed to be assigned to a tenant who is of an inferior financial quality than the assignor, I am sure that the landlord may be able to refuse his consent for assignment unless the weaker financial position has been addressed.

Ramnik

[Editor]

I had in mind a situation where assignor and assignee where of equal financial standing. I'm not sure that the landlord is obliged to take an assignee of inferior financial standing regardless of a guarantee?

[Paul_f]

I'm with the Editor on the last post. If the assignee has an inferior financial position then as a landlord I would probably refuse assignment. The landlord of course puts the onus on the tenant to challenge any refusal to assign in the courts, but they rarely do so because of the cost, and the possible chance of losing too!

[jeffrey]

I found this old thread.
Remember that T can be required to give "Authorised Guarantee Agreement" in respect of assignee.
See the Landlord and Tenant (Covenants) Act 1995.