Businesses change regularly. You might sell your company, move to larger premises, close a particular location or simply find that your existing leased commercial property no longer meets your needs. If there is still time left to run on the lease, one option may be to transfer it to another tenant.
So, can a commercial lease be transferred? In many cases, yes. The process is usually known as ”assignment” of the Lease, with the existing tenant transferring its interest to an incoming tenant.
However, you cannot assume that you are free to transfer the lease simply because you have found another business willing to take the premises. The ability to assign will depend on the terms of the lease, and the Landlord’s consent will often be required.
AFG Law’s Commercial Property team can advise outgoing tenants, incoming tenants and Landlords on business lease assignments, including reviewing restrictions on assignment, obtaining consent and preparing the documents needed to complete the transfer.
What does assigning a commercial lease mean?
A commercial lease assignment will take place by way of a Deed of Assignment or a Transfer (also known as a TR1). Instead of bringing the existing lease to an end and granting an entirely new lease, the outgoing tenant transfers its interest in the existing lease to the proposed new tenant.
The incoming tenant then takes over the lease and becomes responsible for complying with its terms from completion of the assignment. This can provide an alternative where a business wants to leave premises before its lease expires.
However, assigning a commercial lease does not automatically release the outgoing tenant from every possible future responsibility. Depending on the terms of the Lease, the Landlord may require an Authorised Guarantee Agreement.
Does my lease allow assignment?
The starting point is always the lease itself. Commercial leases commonly contain restrictions on assignment. These provisions explain whether assignment is permitted and what conditions have to be satisfied. They are often referred to as the “alienation” clause.
A lease might prohibit assignment altogether, allow it only with the Landlord’s consent, or impose conditions which must be met before consent will be given. There may also be restrictions on assigning only part of the premises.
This means the answer will depend on the terms of the lease. Before agreeing terms with a potential incoming tenant, it is sensible to have the alienation clause in the lease reviewed.
AFG Law can establish what the lease permits and advise on the process that needs to be followed.
Do I need the LLandlord’s consent to assign the lease?
Often, yes you will need the LLandlord’s consent to transfer a commercial lease to someone else. Where the lease requires consent to assign, the outgoing tenant will normally need to make a formal application to the Landlord.
The LLandlord may request information about the proposed new tenant before deciding whether to consent. This could include financial information, accounts, references and details about the proposed tenant’s business.
The Landlord wants to know that the incoming tenant is capable of paying the rent and complying with the other obligations under the lease. Where consent is granted, it is commonly documented through a Licence to Assign.
Tenants should not simply complete an assignment and deal with the Landlord afterwards. Assigning without required consent could amount to a breach of the lease and create significant problems for both the outgoing and incoming tenant.
Can a Landlord refuse to transfer a commercial lease?
Whether the Landlord can refuse the assignment will depend on the wording of the lease and the applicable law.
Where a commercial lease provides that assignment requires the Landlord’s consent, the Landlord may be subject to a requirement not to unreasonably withhold that consent. However, the Landlord can still have legitimate reasons to refuse consent.
For example, concerns about the proposed tenant’s financial strength or ability to comply with the lease may be relevant.
Where the Landlord unreasonably withholds consent, the tenant should obtain legal advice about the options available rather than proceeding with the assignment without permission.
A Landlord receiving an application should also deal with it properly and obtain advice before refusing consent.
What is a Licence to Assign?
A Licence to Assign is a legal document or Deed in which the Landlord formally consents to the assignment of the lease. This will usually involve the Landlord, outgoing tenant and incoming tenant all having to be a party to the Deed .
The licence can set out conditions that need to be satisfied before the assignment of the Lease can take place. For example, it may deal with outstanding sums due under the lease, guarantees or other requirements agreed between the parties.
The Licence to Assign is separate from the assignment document that actually transfers the lease. The precise documentation required will depend on the lease and circumstances of the transaction.
What is an Authorised Guarantee Agreement?
An Authorised Guarantee Agreement, often referred to as an AGA, can require the outgoing tenant to guarantee the incoming tenant’s performance of the lease. This means that although the outgoing tenant has assigned the lease and left the property, it can retain a potential financial responsibility if the incoming tenant subsequently defaults. That is they incoming tenant does not comply with its obligations in the Lease.
For example, if the incoming tenant fails to pay rent, the Landlord may be able to pursue the outgoing tenant under the guarantee, depending on its terms and the circumstances. This can be an important consideration when assigning the lease.
An outgoing tenant should therefore understand whether an AGA is being required and what obligations it creates before completing the assignment.
What happens to the rent deposit?
Rent deposits also need to be considered when a lease is transferred. The outgoing tenant may have paid a deposit when it originally entered into the lease. The incoming tenant may also be required to provide a new deposit as a condition of the Landlord agreeing to the assignment.
The existing deposit does not always transfer automatically from one tenant to another. The parties should establish what will happen to the outgoing tenant’s deposit and whether the incoming tenant needs to enter into a new rent deposit deed.
This should be dealt with as part of the overall assignment rather than being left unresolved after completion.
What should an incoming tenant check?
Taking an assignment of an existing lease is different from negotiating a completely new commercial lease. The incoming tenant will generally be taking the lease with its existing terms and remaining duration.
Before agreeing to transfer the lease, the proposed tenant should therefore have the lease reviewed carefully. Important matters can include the remaining term, rent and rent review provisions, repairing obligations, service charges, permitted use, insurance provisions and restrictions affecting the property.
A break clause should also be reviewed carefully. If the lease contains one, the incoming tenant will need to understand when it can be exercised and any conditions attached to it.
The physical condition of the premises can also be important. Taking over an existing lease can mean taking on repairing obligations relating to a property that another business has already occupied. The incoming tenant should understand those obligations before committing to the assignment.
Can I just surrender the lease instead?
Assignment is not the only way an existing tenant might leave commercial premises early.
Another possibility is negotiating a surrender with the Landlord. This brings the lease to an end by agreement rather than transferring it to another tenant. If the lease contains a break clause, exercising that right could provide another route out, provided its requirements are met.
Which option is preferable will depend on the lease, the Landlord’s position and the tenant’s commercial circumstances.
Where a business has already found a suitable replacement tenant, assignment may be the most practical route. Where it has not, discussing surrender or any available break may be worthwhile.
What is the process for transferring a commercial lease?
Once the lease has been reviewed, the outgoing tenant can establish whether the Landlord’s consent is required and approach a potential incoming tenant. An application for consent can then be made to the Landlord, together with the information required about the proposed tenant.
The parties’ solicitors can negotiate the Licence to Assign, the Deed of Assignment or Transfer, any Authorised Guarantee Agreement and arrangements concerning rent deposits.
The incoming tenant should also carry out appropriate legal checks before taking over the lease.
Once the documentation and any conditions imposed by the Landlord have been dealt with, the assignment can complete and the incoming tenant takes over the lease. There may also be post-completion requirements, including notifying the Landlord and dealing with any necessary Land Registry and Stamp Duty Land Tax requirements.
How AFG Law can help with a commercial lease transfer
Commercial lease assignments can involve several parties and a number of documents, so it is important to establish what the existing lease requires before a Landlord agrees to the assignment.
AFG Law’s Commercial Property team can advise an outgoing tenant looking to transfer its lease, an incoming tenant considering taking an assignment or a Landlord who has received a request for consent.
We can review the lease and its restrictions on assignment, advise on the Landlord’s consent, negotiate a Licence to Assign, prepare or review t the Deed of Assignment or Transfer and advise on rent deposits and Authorised Guarantee Agreements.
If you are considering transferring a commercial lease, contact AFG Law’s Commercial Property team to discuss the lease and the steps required to complete the assignment.