What is an assignment of a commercial lease?
Assignment of lease usually takes place because the outgoing tenant wishes to vacate the commercial premises it is letting. This may be because of a downturn in its business, retirement plans or simply because the premises are no longer suitable for the outgoing tenant’s needs.
This is a transfer of an existing lease by the current tenant to a new tenant with the consent of the landlord.
Tips for tenants when submitting a request for consent
The outgoing tenant’s request for consent to assignment should be submitted to the landlord in a clear and well-written format. It is advisable to obtain proof of delivery and confirmation of receipt to ensure that the landlord has received the request.
The request itself should be as detailed as possible and, as a rule of thumb, should include:
- professional references for the incoming tenant;
- three years’ audited accounts for the incoming tenant; and
- an offer to provide the landlord with further information should this be required.
Reviewing the lease: analyse the consent provisions
All parties will need to familiarise themselves with the provisions of the commercial lease in question.
It is often the case that the lease will stipulate a number of conditions which must be satisfied before consent to assignment will be given by the landlord. Common conditions are that the outgoing tenant and/or another person of standing guarantees the performance of the incoming tenant’s obligations under the lease or that the incoming tenant offers a rent deposit.
The lease will also likely set out a list of circumstances which, if any exist, it shall be deemed reasonable for the landlord to refuse that consent. Such circumstances usually relate to both the outgoing tenant (e.g. the non-payment of rent and/or other breaches of the lease terms) and the incoming tenant (e.g. a lack of financial standing when compared with the outgoing tenant, the incoming tenant (being a company) is registered abroad or is a member of the same group of companies as the outgoing tenant rendering assignment unattractive for the landlord).
The outgoing tenant and the incoming tenant should work together to ensure that any stipulations within the lease are complied with.
Usually, a commercial lease will stipulate that a landlord’s consent to the assignment should not be unreasonably withheld or delayed. Even if no such stipulation is made within the lease, it is best practice that the landlord makes a decision and communicates this to the outgoing tenant within a reasonable time period.
The landlord is entitled to have sufficient information from the outgoing tenant to be able to make a proper decision. A request from the landlord for further information should be made within a reasonable period of time and dealt with by the outgoing tenant promptly.
If consent is to be refused, the landlord should provide the outgoing tenant with clear and detailed reasons for the refusal in writing to avoid any ambiguity.
Why seek legal advice?
By instructing solicitors in connection with the assignment the parties can ensure that the assignment will be conducted promptly and properly. The outgoing tenant will want to ensure that the landlord does not unreasonably refuse or delay consent. Furthermore, the outgoing tenant will want to ensure that it is fully released from all liabilities under the lease, whereas the landlord will want to ensure that the incoming tenant fully assumes those responsibilities.
Who pays the legal fees?
It is likely that the outgoing tenant and the incoming tenant will pay their own legal costs but the landlord will probably expect its legal fees to be paid by the outgoing tenant. In turn, the outgoing tenant may ask for a contribution to the landlord’s legal costs from the incoming tenant.