Key Takeaways
- An alienation clause in a commercial lease controls the tenant’s right to transfer, sublet or otherwise deal with their interest in the lease.
- Most commercial leases prohibit assignment and subletting outright, or require the landlord’s prior written consent.
- Under the Landlord and Tenant Act 1988, a landlord can’t unreasonably withhold or delay consent to an assignment.
- A landlord can legitimately make consent subject to conditions, such as requiring a guarantee from the outgoing tenant or a rent deposit from the incoming one.
- Alienating a lease without the required consent can lead to forfeiture of the lease.
- Tenants should review the alienation clause carefully before signing. It significantly affects flexibility during the lease term.
When a business takes on a commercial lease, one of the most important questions to consider is how much flexibility it has to deal with that lease during the term. Can the lease be passed on if the business is sold? Can part of the premises be sublet to generate income? Can the lease be shared with a group company?
All of these questions are answered (and often restricted) by the alienation clause. Understanding what your lease says about alienation, and what rights you have in any given situation, is essential before entering into a commercial lease and throughout its term.
What Does ‘Alienation’ Mean in a Lease?
Alienation is a collective term for any transaction by which a tenant deals with or transfers their interest in a lease. The main types of alienation covered by a typical commercial lease clause are as follows.
- Assignment: The tenant transfers the whole of the lease to a new tenant (the assignee), who steps into the outgoing tenant’s shoes for the remainder of the term.
- Subletting: The tenant grants a new, shorter lease out of their own lease to a subtenant, while remaining the tenant under the head lease.
- Charging: The tenant uses their interest in the lease as security for a loan, granting a mortgage or charge over it.
- Sharing occupation: The tenant allows another party to occupy the premises or part of them, typically a group company or franchise.
Each of these is treated differently under most commercial leases, and the permitted scope of each varies significantly from lease to lease.
Absolute and Qualified Alienation Restrictions
Commercial leases typically take one of two approaches to alienation restrictions.
Absolute Prohibition
An absolute prohibition means that the tenant can’t assign, sublet or otherwise deal with the lease at all. There’s no exception. Absolute restrictions are relatively unusual in longer commercial leases, but are more common in shorter terms or in leases where the landlord has good reason to maintain control. For example, in shopping centres where tenant mix is carefully managed.
Qualified Restriction
A qualified restriction is the most common approach. The tenant may not alienate without first obtaining the landlord’s written consent. This is where the Landlord and Tenant Act 1988 becomes relevant.
The Landlord and Tenant Act 1988: Consent Can’t Be Unreasonably Withheld
Where a commercial lease contains a qualified restriction on alienation (requiring landlord consent), the Landlord and Tenant Act 1988 implies a statutory duty on the landlord. The landlord must, within a reasonable time, either give consent (with or without conditions) or refuse consent with written reasons.
Crucially, they can’t unreasonably withhold or delay consent. What is ‘reasonable’ depends on the circumstances of each case, but courts have found that consent can’t be refused solely to obtain a benefit not provided for in the lease, or for reasons unrelated to the landlord-tenant relationship.
A landlord who unreasonably refuses or delays consent could be liable to the tenant for damages, including any loss the tenant suffers as a result. For example, because a deal to sell the business fell through.
Conditions the Landlord Can Impose
Even where consent can’t be unreasonably withheld, a landlord can legitimately make consent subject to reasonable conditions. In the case of an assignment, common conditions include:
- An authorised guarantee agreement (AGA): A guarantee by the outgoing tenant of the incoming tenant’s obligations
- A rent deposit from the incoming tenant: Particularly where their financial covenant is weaker than that of the outgoing tenant.
For sublettings, common conditions include:
- A requirement that the subletting is at the open market rent (not at a reduced rent that would reflect poorly on the head lease)
- The sublease contains the same restrictions on further alienation as the head lease
Group Company Sharing
Many commercial leases contain a carve-out allowing the tenant to share occupation with a company in the same group without requiring landlord consent. This is important for businesses that reorganise or operate across multiple entities. The precise definition of ‘group’ and the conditions attached to sharing arrangements vary from lease to lease and should be checked carefully.
What Happens If You Alienate Without Consent?
Alienating a lease in breach of the alienation clause is a breach of a significant covenant of the lease. For example, assigning it without obtaining the required consent. The landlord may seek to forfeit the lease, bringing the tenancy to an abrupt end. They may also seek damages for the breach.
Even if the landlord doesn’t immediately take action, an unauthorised alienation leaves the position legally uncertain and can cause serious problems if and when the landlord discovers it. That could include on a dilapidations inspection, a lease renewal or a sale of the reversion.
Key Negotiating Points When Entering a Lease
Before signing a commercial lease, tenants should seek to negotiate the alienation clause so that it provides sufficient flexibility for the term. Points to consider include:
- Narrowing absolute restrictions to qualified restrictions wherever possible
- Agreeing in advance the circumstances in which consent can be refused
- Limiting the conditions a landlord can impose (particularly AGA requirements)
- Ensuring group sharing provisions are drafted broadly enough to cover likely future business structures
Speak to a Commercial Property Solicitor Today
Osbourne Pinner’s commercial property team advises landlords and tenants across London and Harrow on all aspects of commercial leases. That includes reviewing and negotiating alienation clauses at the outset, advising on consent applications, drafting authorised guarantee agreements, and resolving disputes where alienation has taken place without consent.
Please note that this article is for informational purposes only and does not constitute legal advice. We always recommend speaking to a qualified solicitor for advice tailored to your specific circumstances.
If you need advice on an alienation clause or are dealing with a consent application, our commercial property team can help.
We offer a free 30-minute consultation to discuss your situation. You can speak with us via video call or visit our offices in Harrow, Canary Wharf, Piccadilly Circus or Manchester. To arrange your consultation, call 0203 983 5080, email [email protected] or complete the form below.
