As the effects of the pandemic continue to impact occupiers of commercial space you may be looking at ways to vacate your premises, and assigning your lease is perhaps the most common way to do so. An assignment means that a new person or company steps into your shoes and becomes the tenant in your place. There is no need for a change of name on the lease, by taking the assignment of the lease the assignee automatically becomes the tenant.
Whether or not an assignment is a viable option will depend on three key factors:
- Whether your landlord approves the new tenant (normally their approval cannot be unreasonably withheld or delayed). The landlord will want to be sure that the new tenant will be able to comply with the terms of the lease. They will usually want to see three years’ accounts and perhaps ask for referees.
- Whether the terms of your lease and the rent you pay are acceptable to the assignee – because the assignee is taking on your lease they will want to review the terms of the lease to understand the obligations they will be inheriting (for example repair obligations, or perhaps a looming rent review date), and of course will want to form a view on whether the rent you pay is acceptable. It almost goes without saying, but the landlord won’t reduce the rent.
- Prevailing market conditions. Is there a shortage of office space or an oversupply? Are your premises in good condition for the area or below the standard of other premises? Is your rent high for the area or low? If your premises are dilapidated, at a high rent and there is a glut of office space in the area then tenants may prefer to take on a new lease of alternative premises and perhaps get an incentive from that landlord to do so.
If you have found an assignee willing to take on your premises then you will need to be aware of and consider the following:
- You will have to review your lease to understand the circumstances in which the landlord can refuse consent, and the conditions it can impose to giving its consent.
- You will need to make a formal application to your landlord for its consent, providing details of the assignee and supporting evidence showing that the assignee will be able to comply with the terms of the lease.
- Your solicitors will need to give an undertaking for the landlord’s costs, typically these will be between £1,000 - £2,000 + VAT.
- If you are in arrears of rent or are in material breach of the lease, the landlord will probably require those breaches are remedied before allowing the assignment to go ahead.
- Your landlord may be able to ask that you guarantee to the landlord that the assignee will comply with the terms of the lease, indemnify the landlord against losses it may suffer if the assignee breaches the lease (this would mean for example you having to pay the rent if the assignee does not) and in the extreme event that the assignee becomes insolvent and the liquidator disclaims (gives up) the lease, you might either have to take on a new lease yourself or pay the landlord six months’ rent. These obligations would all be contained in a document called an Authorised Guarantee Agreement.
- If your landlord is unsure whether the assignee is able to comply with the terms of the lease they may ask that the assignee pay a rent deposit or put forward its own guarantors. Depending on the terms of your lease these may be in addition to any Authorised Guarantee Agreement.
- If prevailing market conditions are such that finding someone to take on your lease is difficult, you may have to offer incentives. These would normally have to be approved by your landlord, but could be payment to the assignee of a sum equivalent to a rent free period to allow them to carry out works to the premises, or a contribution towards the cost of works that the assignee will have to carry out to put the premises in the condition required by the lease.
- If you have given security to your bankers for lending/overdrafts etc., the consent of your bank may also be required.
How can we help?
We can help you through this process – we can review with you the terms of your lease to understand the obligations around assignment, we can apply for consent and negotiate documents with the landlord, and we can assist with the assignee’s solicitor’s questions about the property and the lease and negotiate the assignment documents.
For further assistance and support, please get in touch with your usual Real Estate contact at DMH Stallard or with Tom Watkins
or by phone on 020 7822 1571.