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Preparing to assign a business lease

Planning for an Assignment of a Lease

Preparing to assign a business lease 

Sometimes a tenant will want to leave its premises before the end of the term of its lease. This could be because the tenant needs bigger or smaller premise or wishes to relocate or because the tenant’s business is struggling and it cannot afford to pay the rent.

Unless the lease has a break clause, or the tenant is able to negotiate a surrender of the lease with the landlord, the tenant is likely to look to assign the lease (in other words, sell the lease to a new tenant).

Does the lease permit assignments?

Before taking any further steps, the tenant needs to check the terms of the lease carefully. The “alienation” covenant will set out whether assignment is permitted, whether the landlord’s consent is required (it almost always is) and whether there are any conditions that must be satisfied in order for the assignment to go ahead.

If the lease has an absolute prohibition on assignments, the tenant will be stuck with the lease for the rest of the term unless it is able to underlet (if the lease permits this) or, as suggested above, negotiate a surrender with the landlord.

A common condition is a requirement for the outgoing tenant to enter into an “authorized guarantee agreement” (AGA) to guarantee the assignee’s covenants to pay rent and comply with the terms of the lease. This mechanism was introduced by the Landlord and Tenant (Covenants) Act 1995.

Other possible conditions include a stipulation that the assignee must be of the same or better financial standing as the outgoing tenant and/or a requirement for a guarantor or rent deposit to be provided.

Seeking the landlord’s consent to an assignment 

Assuming that the lease permits assignments subject to obtaining the landlord’s consent, the tenant will need to apply for the landlord’s consent. This can only be done formally once the tenant has marketed the property and found a buyer for the lease. However, it is wise to inform the landlord at an early stage that an assignment is contemplated so that the landlord can confirm what information it will require in order to make a decision on consent.

The tenant should make an application in writing seeking the consent of the landlord to the proposed assignment of the lease. The tenant should include all relevant information about the proposed assignee, which is likely to include company details, audited accounts and references.

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