Conditions Landlords Should Consider for a Lease Assignment or Subletting
When a landlord is granting a lease to a tenant, they will need to consider the possibility that in the future a tenant may wish to end their lease early, and the best option for them will usually be to assign or sublet the lease to a new tenant. This can either be done permanently through the assignment of the lease to a new tenant or by the current tenant subletting the property to someone else.
In either case, the landlord will want to consent to the assignment or sublease, and they will need to carefully consider what conditions they may want to impose in the lease to protect themselves.
In this article, we cover the risks for landlords with a lease assignment or sublease, what conditions they might want to include to mitigate those risks before giving consent and how our Commercial Property team can help.
Need help with a lease assignment or sublease? Please contact Annette Monthy, who will be happy to advise.
Key points for landlords to know when granting a lease which allows for assignment or subletting
- In order to have an element of control, a landlord should consider whether consent should always be obtained by the tenant from the landlord before any assignment or subletting takes place.
- When consenting to a sublease, the original tenant remains bound by the terms of the agreement.
- When consenting to the assignment of a lease, you can add provisions into the lease to require the existing tenant to sign an Authorised Guarantee Agreement, so they remain liable for any breaches of the lease by the new tenant or require a separate guarantor to guarantee the tenant obligations.
- You can protect against the risk of non-payment of rent by requiring the new tenant to provide a guarantor or rent deposit.
- You can require the existing tenant to cover your legal fees for a lease assignment or sublease.
- Landlords cannot unreasonably refuse consent for an assignment or sublease, but there is scope to include circumstances when refusal is reasonable.
The risk of swapping a good tenant for a bad one
The main risk when agreeing to a lease assignment or sublease is that the new tenant is generally unknown to you.
If you don’t have an existing relationship with them, you cannot be sure that they will stick to the terms of their lease, and you could be swapping a reliable tenant for one who will cause you problems. This is why requiring landlord’s consent before an assignment or sublet is important. In the case of a sublease, you will not be involved in choosing the subtenant, giving you less control over who is occupying your property, however you can include conditions within the subletting provisions of the tenant’s lease in order to control other aspects of the sublease, such as making sure the sublease ends on or before your tenant’s lease and requiring the sublease to be no less onerous than your tenant’s lease.
One of the best ways a landlord can mitigate this risk when consenting to a lease assignment is to have a condition in the lease which requires an Authorised Guarantee Agreement is be entered into by the original tenant.
This is a legal contract that makes the original tenant liable if the new tenant does not meet their obligations under the lease. So, for example, if the new tenant fails to pay their rent, the original tenant would be required to pay it.
You may also want to consider including as a condition in the lease, for a person of good standing to enter into a guarantee and indemnity in relation to the tenant covenants in the lease, meaning that the guarantor could end up taking over the tenant obligations and potentially entering into a new lease with the landlord, if the new tenant fails to meet its obligations under the lease.
For a sublease, the original tenant remains bound by the terms of their original lease agreement, meaning that they could be held liable for any breaches by the new subtenant.
The risk of the new tenant not paying their rent
The risk landlords tend to be most concerned about is that a new tenant or subtenant will simply not pay the rent. If the current tenant has been a reliable payer, switching to someone who may be less reliable can be a real concern.
There are a couple of common options landlords can use to protect against the risk of non-payment of rent.
First, they can require a guarantor for the new tenant/subtenant. This provides assurance that the rent will be covered if there is a problem securing payment from the new tenant or subtenant.
Second, they can require a rent deposit, which will typically be equal to around 3-6 months’ rent. The landlord would then hold this deposit as security against any future non-payment of rent. However, this could put off potential tenants as it can be a significant sum to pay upfront.
The cost of legal fees
Something else to consider is any legal fees you will incur as part of the assignment or sublease. Requiring Landlord’s fees to be paid by the tenant as a condition for consenting to an assignment is likely to be considered unreasonable.
However, the good news is that it is common to require the current tenant to cover these so you do not end up out of pocket, but it should be covered under the “costs” section of the lease.
The risk of refusing consent for a lease assignment or sublease
It is important to recognise that you cannot ‘unreasonably’ refuse consent for a lease assignment or sublease and such consent must be given within a reasonable time. If your tenant feels a refusal is unreasonable or is being unreasonably delayed, they could potentially take legal action against you, which could be very costly.
If you are considering refusing consent, you should always seek expert legal advice before doing so to make sure you have reasonable grounds for the refusal.
It is useful to set out in the lease, circumstances in which it is reasonable for the landlord to refuse consent to an assignment, although you should bear in mind that if these conditions were deemed too restrictive, this could have an impact on any rent review.
Examples of circumstances where refusal of consent would be reasonable and should be drafted into the lease can include:
- Where there is outstanding rent or other sums
- Where there is a material breach of the lease which has not been remedied
- The assignee is not of sufficient standing after obtaining evidence of their covenant strength.
It is also important to set out in the lease that the landlord is not precluded from withholding consent for any other reasonable reason or subject to another reasonable condition, so that it is clear the list set out in the lease is not an exhaustive list.
How Longmores can help with lease assignment and subletting
At Longmores, our Commercial Property team have extensive experience in protecting landlords with robust lease conditions, including in relation to the assignment of leases and subletting.
We can ensure that all potential issues are considered and guarded against, giving you a future-proof lease assignment you can rely on.
To discuss how we can help with a lease assignment or sublease, please contact Annette Monthy, who will be happy to advise.
Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.
