Most leases contain a section titled ‘Alienation’ which deals with assigning and subletting the lease. As every lease is different, it is important that the specific requirements of each lease are looked at first.
Even where a business lease contains a clause that prevents the tenant from assigning the lease, it is possible for the tenant to seek the landlord’s consent and proceed with assigning the lease.
The Licence to Assign
The landlord’s consent is given in the form of a ‘Licence to Assign’, and this deed is usually signed by the landlord, the outgoing tenant, the incoming tenant (assignee) and if applicable, the guarantor.
The landlord’s primary concern will whether the incoming tenant will be able to pay the rent, and for that reason, the landlord will need to see the usual bank and trade references. If the incoming tenant is setting up business for the first time, the landlord is likely to require a guarantor to sign up to the deed of licence.
The Deed of Assignment
This document is signed by the outgoing tenant and the incoming tenant/assignee, and it transfers the lease. Any consideration paid for the transfer of the lease will be recorded in the deed.
The Authorised Guarantee Agreement
The Landlord and Tenants (Covenants Act) 1995, which came into force on 1st January 1996, changed the liability that tenants have under a lease. A tenant who signed a lease before this date was generally caught by ‘Privity of Contract’, which meant that the original tenant remained liable under the terms of the lease for the whole duration of it. This meant that a Landlord could go back to the original tenant to obtain payment of rent arrears which had accrued long after that tenant had sold the lease. However, the Act has brought in rules so that this does not apply to leases entered into after that date.
Leases entered into after 1st January 1996 usually contain provisions which enable the landlord to call upon the outgoing tenant to sign an Authorised Guarantee Agreement. This is an agreement whereby the outgoing tenant guarantees the performance of the incoming tenant. This applies for one assignment only – i.e. if the lease is assigned again then the liability under the authorised guarantee agreement ends automatically.
It is becoming increasingly common for the Licence to Assign to contain an Authorised Guarantee Agreement clause, by which the landlord obtains the required guarantee from the outgoing tenant.