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 assigning 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 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 commercial lease transfers, including reviewing restrictions on assignment, obtaining consent and preparing the documents needed to complete the transfer.
What does transferring a commercial lease mean?
A commercial lease transfer will commonly take place by way of either a Deed ofAssignment or Transfer. 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, transferring a commercial lease does not automatically release the outgoing tenant from every possible future responsibility. Depending on the circumstances, the landlord may require an Authorised Guarantee Agreement, which we explain below.
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 or a prohibition on assigning only part of the premises.
This means the answer will depend on the lease. Before agreeing terms with a potential incoming tenant, it is sensible to have the alienation provisions of 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 landlord’s consent to assign the lease?
Often, yes you will need the landlord’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.
It is important at this stage to check the lease to determine that a simple written consent is required from the landlord or whether the consent can only provided by way of deed (often called a “Licence to Assign”).
The landlord 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 consent to 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 it often also states that the landlord is 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. The precise circumstances will matter.
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 through which the landlord formally consents to the transfer of the lease. This will usually involve the landlord, outgoing tenant and incoming tenant.
The licence can set out conditions that need to be satisfied as part of the transaction. 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 the consent on behalf of the landlord to the assignment of the lease, it 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.
For example, if the new 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.
If there is a guarantor to the lease then landlords can sometimes require the guarantor to guarantee the outgoing tenant’s obligations in the authorised guarantee agreement. This would be in addition to the outgoing tenant providing a guarantee. This situation is referred to as a GAGA.
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 took 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 necessarily 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. The incoming tenant does not have the ability to negotiate the terms of the lease. They are generally fixed.
Before agreeing to take an assignment of 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. Often, if an outgoing tenant has not complied fully with its repairing obligations then the incoming tenant will be left to undertake any outstanding repairs.
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. Tenants do not generally have the right to surrender a lease early. This will only be possible if the landlord consents. Landlords can refuse to provide that consent. Sometimes, they can be persuaded to consent if a payment is made to the landlord. This is referred to as a “surrender premium”.
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 right 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, 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. It is important that the assignment is not completed before the consent is formally provided by the landlord, whether that is simply in writing or by a Licence to Assign. 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 agreeing the transfer.
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 the assignment documentation 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.