Assignment of Lease
Commercial (Business) Tenancies
Transferring a Business Lease - the process
Tenants sometimes wish to leave their business tenancy early, because of business failure, because they have outgrown the premises, or they may wish to sell / transfer their business and/or the business premises which they occupy, to another tenant. This process is known as Assignment Rental, Property, Knowledge
Most leases allow assignment (some short leases don't) so landlord and tenant should read the lease very carefully. If a landlord receives a request from the tenant to assign, he must not unreasonably refuse or delay. If the landlord does, and the tenant suffers financially, the landlord could be liable to pay damages.
The landlord will be concerned to ensure (by carrying out checks) that any assignee has similar or better covenant strength (security and financial standing) to that of the existing tenant.
The landlord will also want to ascertain that the proposed use or change of use is acceptable and in accordance with the user clause in the existing lease and planning consents - the use class.
The landlord can refuse consent to assignment where the proposed assignee does not pass the financial checks, or where the proposed use is not acceptable.
Where a proposed assignee fails the financial checks, or is not of equivalent financial standing to the original tenant (e.g. is not a house owner) then the landlord may stipulate that a suitable guarantor is provided by the assignee.
Preparations for Assignment
If an existing tenant wishes to get out of the lease or to sell their business and assign their tenancy, there will be a number of requirements under the terms of the lease that must be complied with. The following pointers aim to guide you through the process of assigning a lease:
- Read the lease very carefully
- It is advisable for the tenant and the assignee to appoint a solicitor and possibly a surveyor
- The landlord & tenant should check to make sure that all the tenants' covenants have been met - the landlord may, at this stage wish to have a surveyor draw-up a schedule of dilapidations.
Tenant's Covenants
The landlord will usually refuse to grant a license to assign unless the current tenant (the assignor) has substantially complied with the lease covenants.
These will usually include, besides other responsibilities:
- ensuring that the rent payments are up to date
- ensuring that the Business Rate payments are up to date
- ensuring that all utility companies (ie electric, gas, water, telephone) up to date
- ensuring that all repairing and decorating obligations have been complied with
- ensuring that any any alterations carried out to the premises were carried out according to the terms in the lease - you have obtained written permission etc
- ensuring that the lease has been registered with the Land Registry where appropriate
The landlord should be careful not to imply that a license will be or has been granted by heading all correspondence with "subject to licence" and not doing anything prematurely to suggest that the proposed assignee has been accepted as a tenant.
Marketing the Business and Finding a New Tenant
It is the existing tenant's responsibility to find a buyer for the business and/or a new tenant to take over the existing lease. It is usually, though not always, necessary to appoint a local commercial agent or a business transfer agent.
Small businesses are often transferred to members of staff of the existing business or to others already known to the business owner.
Transfer of the Business / Lease
Once a purchaser has been found, the tenant will require consent from the landlord - a license to assign.
- The tenant writes to the landlord formally requesting consent to assign. The letter should include full details of the assignee and the assignee's solicitor.
- The landlord replies (subject to licence) acknowledging receipt of the request and giving details of his solicitor.
- The landlord writes to the tenant (or direct to the assignee) enclosing a commercial tenancy application form. This form requests information from the assignee to enable the landlord to carry out financial and reference checks. By signing the form the assignee gives the landlord permission to carry out these checks.
- The landlord carries out the financial checks and referencing on the assignee and any guarantor.
- The landlord Instructs his solicitor to write to the existing tenant (the assignor) setting out his terms:
- Writing "Subject to License" the solicitor will state, for example:
- The landlord is minded to give consent to assignment subject to a formal license being executed
- That any guarantor required shall be willing and able to guarantee the assignee's obligations
- That completion of a formal Deed of Assignment be executed between the assignor and assignee (by their respective solicitors) is required before consent will be given
- That all reasonable covenants have been complied with
- That the landlord's reasonable costs shall be paid by the assignor
- That the assignor provide details of his and the assignee's solicitors.
Never rely totally on this information which relates primarily to England & Wales. Before taking action or not, seek expert advice with the full facts of your case and all documents to hand.
