Tenants require the flexibility of being able to dispose of their interest in leasehold premises for a number of reasons including where business is expanding and tenants are wanting to relocate to larger premises or where business is struggling and tenants are wanting to downsize or simply close their business. Most leases contain restrictions on assignments as the Landlord will want to ensure that the incoming tenant/assignee is able to pay the rents and comply with the tenant covenants in the lease.
The landlord’s statutory duties
In the absence of any restriction, a lease will be freely assignable. Most commercial leases will forbid the tenant to assign the lease without obtaining the landlord’s consent. Section 19 of the Landlord and Tenant Act 1927 adds that such consent must not be unreasonably withheld
The landlord can only refuse to grant consent if:
- it is done within a reasonable time of the tenant’s application
- the grounds of refusal are reasonable
- the grounds of refusal are given in writing
Being in breach of these statutory duties will allow the tenant to sue for damages suffered as a result of the unreasonable refusal.
What grounds are reasonable to refuse an assignment?
What is considered a reasonable ground of refusal varies according to the circumstances of each case. However, a carefully drafted lease will allow for some certainty to the landlord.
- Set out conditions of refusal in the lease
According to section 19 (1A) of the Landlord and Tenant Act 1927 the landlord can insert conditions in the lease, which need to be met in the case of an assignment. If these conditions are not met, the landlord’s refusal to assign the lease will be deemed reasonable. The landlord could for example require the prospective assignee to be of sufficient financial standing to comply with the covenants of the lease.
Each condition relating to the assignment of the lease must therefore be carefully drafted, as it is a powerful tool to protect the landlord’s interest. Once agreed and included in the lease, the tenant cannot argue that it is not reasonable at the time of assignment.
- Set out conditions of acceptance
The landlord may also include conditions in the lease under which it is prepared to grant consent for an assignment.
It is very common for the assigning tenant to be required to enter into an Authorised Guarantee Agreement. Under an Authorised Guarantee Agreement, the outgoing tenant guarantees that the incoming Tenant/assignee will comply with all the tenant covenants in the lease. This enables the landlord to enforce the guarantee in the event of the assignee’s failure to comply with the terms of the lease.
What is reasonable time?
There is no definition of what constitutes reasonable time for the landlord to answer a tenant’s request for landlord’s consent to assign a lease. This will depend on the complexity of each case, and the most straightforward request might require a response within two or three weeks. Any landlord is well advised to act quickly as soon as a written application is received from the tenant.
For further information/advice on assigning leases please contact Taylor&Emmet’s Commercial Property Department.