Alienation (or dealing with your lease!)

Alienation is the legal term for assigning, sub-letting, charging or otherwise dealing with a tenant’s interest in a lease of property. In a lease of commercial property, whether a tenant can do any of these is dependent on what the lease does or doesn’t say. In this blog we are looking at assignments of leases. Our next blog will deal with sub-letting.

If a tenant wishes to dispose of its interest in a commercial property, it will need to assign its lease. If the lease contains no provisions dealing with alienation, the tenant will be free to deal with it as it wishes. However, this is very rare and most leases will contain detailed provisions dealing with alienation.

A lease may provide that the tenant can assign part only – for example in a block of offices, it may be able to assign one or more floors of the building. However, in a smaller property the lease will usually prohibit an assignment of part. A lease may also prohibit assignment completely, although this would be extremely unusual and would normally only be seen where the property and/or the tenant are particularly unique.

Occasionally a lease may permit assignment without the landlord’s consent. However, that would normally only be seen where the lease is for a very long term (99 years up), a significant premium has been paid and there is no rent payable. Even then, the lease will usually require details of the assignment to be registered with the landlord after completion.

Where a lease permits assignment (whether of whole or part), it will usually state that consent will only be permitted with the Landlord’s prior written consent. In practice this means that a formal “licence for alterations” will need to be entered into between the landlord, the existing tenant, the incoming tenant and any guarantor (see below). Both the existing and the incoming tenant (and of course the landlord) should always seek legal advice before entering into the licence, to check the terms and conditions of it.

If the lease simply states that the Landlord’s consent must be obtained but does not make this subject to a requirement that it must not be unreasonably withheld, then the landlord is free to withhold its consent whether reasonable or not (and will not be required to provide an explanation). However, landlords should always be aware that a too-tight alienation clause may have an adverse affect on the rent review (if any) under the lease.

It is more common for the lease to state that where the landlord’s consent is required, such consent must not be “unreasonably withheld”. What constitutes consent being “unreasonably withheld” is usually a question of the circumstances in each individual case, including the nature of the property, the identity of the current and proposed tenants, the amount of rent and the length of the remaining term. If the landlord is required not to unreasonably withhold its consent but does not respond to a tenant’s formal application for consent within a reasonable time,that can be deemed to be an unreasonable withholding of consent.

The landlord can choose to grant consent subject to conditions, which again are usually subject to a reasonableness requirement (depending on what is stated in the lease). Most modern forms of lease (1996 onwards) will set out examples of circumstances in which the landlord will be entitled to refuse consent. These may include:

(a) if the rent [or any other money due under the lease] has not been paid;

(b) if there is a [material] breach of covenant by the tenant that has not been remedied to the Landlord’s [reasonable] satisfaction;

(c) if [in the landlord’s reasonable opinion] the assignee is not of sufficient financial standing to enable it to comply with the tenant’s covenants and conditions contained in this lease; or

(c) if the outgoing and incoming tenants are “group companies”.

We would always advise a tenant to try to resist (a) and (b) as these could result in it being unable to assign the lease. Payment of any money due will mean it cannot challenge, for example, what it perceives to be an unfair service charge amount, if it wants to assign its lease immediately. A tenant will also almost always be in breach of some of the minor tenant covenants. If these circumstances cannot be deleted when the lease is negotiated, the tenant should at least try to have the words in square brackets included. However, depending on the bargaining strength of the parties, the tenant may have no option but to accept the clauses as drafted.

A modern form of lease is also likely to set out examples of conditions which the Landlord can grant consent subject to. These may include:

(a) a condition that the outgoing tenant enters into an “authorised guarantee agreement” [if reasonably required] – see below;

(b) a condition that a person or persons [reasonably] acceptable to the Landlord enter into a guarantee of the tenant covenants of the lease.

Again, the tenant should try to have the words in square brackets inserted, although the Landlord is unlikely to agree to these.If reasonable, the landlord can also withhold consent or grant it subject to other conditions which are not set out in the lease.

An “authorised guarantee agreement” (or “AGA”) is a form of guarantee entered into by the outgoing tenant, in which it guarantees that the incoming tenant will comply with all the tenant covenants in the lease (including payment of rent, carrying out of repairs etc). If the incoming tenant is in breach of the lease, the landlord can choose to enforce the covenants against either the previous or the incoming tenant. A tenant who enters into an AGA will usually seek an indemnity from its assignee, requiring it to reimburse it for any costs it incurs if the Landlord comes after it. However, such a covenant will be worthless if the assignee does not have any money. Unfortunately landlords almost always require outgoing tenants to enter into AGA’s and although it is possible to limit the requirement to “where reasonable”, landlords often refuse this.

In leases dated prior to 1 January 2006 (“old leases”), there will be no reference to an AGA. This is because a tenant of an “old lease” will always be liable for the tenant covenants in the lease, whether or not it has assigned its interest in the lease.

For further information please contact Victoria Sandberg.

Please note the contents of this note are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.