Key Takeaways
- Assignment of a commercial lease transfers the tenant’s rights and obligations under the lease to a new party – the assignee.
- Most commercial leases require the landlord’s consent before an assignment can take place. Landlords cannot unreasonably withhold or delay that consent.
- The outgoing tenant may be required to enter into an Authorised Guarantee Agreement (AGA), making them liable if the assignee fails to pay rent or comply with the lease.
- Where the lease was granted before 1 January 1996, the original tenant can remain liable for the full term of the lease even after assignment.
Assigning a commercial lease is the most common way for a business tenant to exit a lease before it expires. Whether the business is closing, moving to different premises, or being sold, assignment transfers the tenant’s full legal position to a new party, covering both rights and obligations, who takes over responsibility for the lease going forward.
The process is more involved than simply finding someone to take over the keys. Landlord consent is usually required, conditions are typically attached and the outgoing tenant may retain some liability even after the assignment has completed. Our commercial property solicitors at Osbourne Pinner offer a free 30-minute consultation and can advise on the assignment process for your specific lease. Our assignment, subletting and change of use dispute solicitors can also advise where a landlord is refusing consent or imposing unreasonable conditions.
What Is an Assignment?
An assignment is a legal transfer of the tenant’s entire interest in a lease to a new party. The outgoing tenant is called the assignor. The incoming party is the assignee. After a valid assignment, the assignee steps into the assignor’s shoes and becomes directly liable to the landlord for all future obligations under the lease.
Assignment is different from subletting. A sublease creates a new lease between the existing tenant and a subtenant, with the existing tenant remaining responsible to the landlord. Assignment transfers the tenant’s position entirely. As explained below, the assignor may still retain some liability through an AGA.
Landlord Consent
Almost all commercial leases prohibit assignment without the landlord’s prior written consent. The Landlord and Tenant Act 1988 requires the landlord to respond to a formal application for consent within a reasonable time, to give consent unless there are good grounds for withholding it, and to give written reasons for any refusal or conditions.
Landlords cannot unreasonably withhold consent to assignment. Reasonable grounds for refusal include genuine concerns about the assignee’s financial standing, the nature of the business the assignee intends to carry out, or where the proposed assignment would breach some other provision of the lease. Refusing consent simply because the landlord does not want to lose a reliable tenant is not a legitimate ground.
The lease may also set out specific circumstances in which consent can be withheld or conditions attached. These are called ‘absolute’ or ‘qualified’ alienation covenants. A qualified covenant requires the landlord’s consent, which cannot be unreasonably withheld. An absolute covenant prohibits assignment entirely, though these are relatively rare in modern commercial leases.
The Authorised Guarantee Agreement
Under the Landlord and Tenant (Covenants) Act 1995, leases granted on or after 1 January 1996 release the outgoing tenant from liability on assignment, at least in principle. However, the landlord can make its consent to assignment conditional on the outgoing tenant entering into an Authorised Guarantee Agreement (AGA).
An AGA makes the assignor a guarantor for the assignee’s obligations under the lease. If the assignee fails to pay rent or comply with the lease covenants, the landlord can pursue the assignor under the AGA. The AGA only lasts for as long as the assignee remains the tenant. It falls away on any subsequent assignment.
Assignors should understand what they are taking on under an AGA before signing. If the assignee is a new or financially uncertain business, the liability under the AGA can be real. Assignors sometimes seek to negotiate a cap on the AGA or to exclude certain categories of liability, particularly where they have limited visibility of the assignee’s future financial position.
Pre-1996 Leases: Continuing Liability
For leases granted before 1 January 1996 (known as ‘old leases’), the position is significantly different. Under the original privity of contract principle, the original tenant remains liable for the full term of the lease regardless of how many times it has been assigned. If an assignee defaults, the landlord can pursue the original tenant directly, even decades after the assignment took place.
Tenants with an old lease who are considering assignment should take legal advice on their continuing exposure before proceeding. There are notification obligations and some protections under the 1995 Act, but the fundamental liability risk for old leases is considerably higher than for modern ones.
The Assignment Process
Once the parties have agreed commercial terms and the landlord has consented, the assignment itself is completed by a formal deed of assignment. The deed transfers the lease from the assignor to the assignee, and the assignee enters into direct covenants with the landlord to observe and perform the lease obligations going forward.
The assignor’s solicitor will deal with the landlord’s solicitor on consent and the form of the AGA. A licence to assign is typically produced, incorporating the consent, any conditions and the AGA. The deed of assignment is then executed separately. Stamp Duty Land Tax (SDLT) may be payable on the assignment depending on whether there is a premium and the level of any remaining rent obligation.
See also: Commercial Property Possession Rights: A Guide
What If the Landlord Refuses Consent?
If the landlord refuses consent or fails to respond within a reasonable time, the tenant may be able to proceed without consent or seek a court declaration that consent has been unreasonably withheld. The tenant can also claim damages for any loss caused by an unreasonable refusal or delay.
In practice, most disputes about consent are resolved through negotiation rather than litigation. The landlord may have concerns about the proposed assignee that can often be addressed: stronger financial references, a rent deposit or a guarantee from a parent company. Understanding the landlord’s position early and addressing it directly is usually more effective than going to court.
Speak to a Commercial Property Solicitor about Assigning Your Lease
Assignment looks straightforward but carries real legal and financial risks – particularly the ongoing liability that an AGA creates. Getting the consent process right, understanding what you are guaranteeing and ensuring the deed of assignment is properly drafted protects the assignor’s position after they have left the property.
At Osbourne Pinner, our commercial property solicitors advise tenants and assignees on the assignment process, landlord consent applications, the terms of Authorised Guarantee Agreements and disputes arising where landlords withhold or delay consent unreasonably.
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.
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.
