When a good tenant wants to assign their commercial lease, understandably, the landlord may have serious concerns. Will the new tenant take good care of the property and be as responsible as the previous tenant? However, the tenant equally may be concerned if the assignment of the lease affects the ongoing success of their business.
Jeremy Blatherwick, commercial solicitor at Tallents in Newark looks at the key concerns surrounding commercial lease assignments for the parties to the assignment.
An assignment of a Commercial Lease is where a new tenant steps into the shoes of the original tenant and takes over the lease going forward. As a result, there are three different perspectives to take into account on lease assignments, not just the landlord and the tenant, but also the new incoming tenant, usually called the assignee.
Landlords will, quite reasonably, always want to ensure that they have a degree of control over who is occupying their properties, after all, the landlord’s interest might be harmed if a responsible tenant assigns the Lease to a less reliable replacement.
Equally, tenants typically expect a degree of flexibility in their leases to take account of changing circumstances, for instance if they need to expand (or indeed downsize) premises, or in the event of selling their business and needing to hand on the Lease as part of the sale.
He continues,
Assignees will want to ensure that they are taking on a lease which gives them all of the protections that they need, and that they will have a suitable degree of flexibility going forward too.
Ensure commercial leases are well drafted
A well-drafted commercial lease should aim to strike a suitable balance between these competing factors. The issues should be considered at two separate points in the process:
Lease drafting – when the lease is drafted the landlord and the tenant should ensure that they are satisfied that suitable wording is in place to deal with the prospect of future assignments, even if at the time they may think it is unlikely to ever come up.
This is an issue in particular for tenants, who should consider the whole of the lease and think ‘if I came to assign this lease, is there anything in it which a potential assignee might not like?’ Some tenants might, for instance, be willing to enter into certain lease clauses which other people may not want in their leases, and there may be a risk that by going ahead, the tenant might end up taking on a lease which could be harder to assign if they ever needed to.
On assignment – it is crucial that the procedure as set out in the lease is checked and followed so as to ensure that the assignment is valid. All parties are likely to need professional advice in terms of the assignment procedure.
Commercial lease assignment with the landlord’s prior consent
A typical approach found in many commercial leases would be to say that a tenant can only assign the Lease with the Landlord’s prior consent, but that the landlord cannot unreasonably withhold or delay giving consent. The main ground on which a landlord might reasonably be entitled to refuse consent would be if the assignee did not appear to have the standing and resources to pay the rent and abide by the tenant’s obligations in the Lease.
Tenants acting as guarantor for the assignee
In addition, most commercial leases would normally contain reference to certain conditions, which can be attached to the landlord’s permission for an assignment. The most important of these is normally that the tenant must agree to act as guarantor for the assignee for the period up until either the end of the lease or when the assignee enters into a further assignment; this means that the tenant remains liable to the landlord if the assignee breaches the lease. Other conditions might involve the lodging of a rent deposit and/or the provision of guarantors by the assignee.
Dealing with everyone’s concerns
Each of the parties will have to ensure that their own concerns are dealt with as part of the process:
Landlords will usually want to see references in relation to the assignee in order to check that they are of suitable standing to take over the lease and fulfil the tenant’s obligations. The assignee should have the details ready as soon as possible so as to avoid any delay.
Tenants should also be taking an interest in the standing of the assignee – as explained above, if the tenant is expected to be the assignee’s guarantor then the tenant should try to ascertain whether the assignee is likely to be a good tenant because, if they are not, the tenant could be called upon under the guarantee.
Assignees will need to check the lease carefully to check that it does not contain any provisions that do not work for them. Unless a variation to the lease can be agreed as part of the assignment, the assignee will step into the shoes of the tenant and will ‘inherit’ any problematic issues. On a similar theme, the assignee should be concerned to check that the tenant has complied with the lease, for instance in relation to keeping the property in repair, because from the moment of the assignment, any liability may be passed on.
Tallents’ commercial property department has experience in advising landlords, tenants and assignees regarding all aspects of commercial lease assignments and the landlord and tenant relationship. In the event of a dispute then our specialist litigation solicitors can help guide clients through the process.
For more information please contact one of our commercial lawyers on 01636 671881.