Do you hold a lease on a commercial premises?
Do you want to sub-let it? Or assign (transfer) it to someone else?
You may run into difficulties with your landlord, though.
Let’s take a look at the issues.
Most leases will have a restriction on alienation-assignment or sub-letting- contained in the lease. This is to allow the landlord to protect his investment by ensuring that the quality of his tenant is high.
Because any tenant can ultimately obtain security of tenure in the premises. And if he is a poor tenant and the landlord is forced to enforce the covenants in the lease it is going to cost time, money, inconvenience, and possible diminish the value of the landlord’s property.
However, the landlord will also need to consider how restrictive the alienation clause is, because if it is unduly restrictive it will have an adverse effect on the rent he can achieve. Quite frankly, less tenants will be prepared to take it on if they think that they cannot assign or sub-let it in the future, if necessary.
The tenant will need to consider his business, how restrictive the covenant is, and the premises itself.
Restrictions on Alienation
All commercial leases will contain a restriction on the assignment or sub-letting of the premises without the landlord’s consent, and an absolute prohibition on letting part of the premises.
Put simply, the landlord is entitled to ensure the property is not handed over to an undesirable who will devalue the landlord’s property.
However, the landlord is not entitled to unreasonably withhold his consent to alienation. The question of what is “reasonable” is a thorny one, though.
There is no statutory definition of a reasonable refusal, therefore it is a question of fact and circumstances in each particular case. If a tenant is not happy with the landlord’s decision, he can go to Court to seek a declaration that the consent is being withheld unreasonably and allowing the assignment/sub-letting to go ahead without the consent.
The case of International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] provides a good summary of the principles to apply in determining whether the landlord’s consent has been unreasonably withheld or not.
Many leases will also contain a pre-emption clause. This gives the landlord first refusal on any assignment.
He may also have the right to match any 3rd party offer.
Break Clauses
Tenants will look for a break clause in the lease. This will allow for circumstances changing in the future.
Generally, the breaks clause would be exercisable at the time of the 1st rent review, but this is entirely a matter for negotiation between the parties at the outset.
Most break clauses will only be exercisable when the tenant has complied with all provisions in the lease.
Assignment of Lease
The existing tenant must ensure appropriate references-trade and bank-are obtained and submitted to the landlord, along with the request for consent to assign.
The existing tenant will also have to be released from his personal guarantee, if he has given one.
The new tenant’s solicitor must make the usual conveyancing enquires about title, planning permission, mortgage on the property, and the usual pre-lease enquiries.
Service charges, and any other annual charges, will have to be apportioned between new and existing tenant.
The landlord, and his solicitor, will be anxious to ensure that the new assignee is as satisfactory as the existing one.
Sub-Letting
The existing tenant will be the landlord for the sub-tenant and he will be granting a sub-lease to the sub-tenant. He will need to get references from the sub-tenant to give to the head landlord, and apply for the head landlord’s consent to the sub-letting.
The sub-tenant, in addition to ensuring the proposed sub-lease is satisfactory, will need to ensure that the head landlord’s consent is given for the sub-letting.
The head landlord’s position is not affected from a legal perspective as he will still have his original tenant on the hook as that tenant will remain contractually liable to the landlord.
Partial Assignment or Sub-Letting
Most modern commercial leases will prohibit partial assignment or sub-letting.
Conclusion
Hopefully, you will see from the above that entering into a lease can be a complex matter which should not be undertaken without professional advice.
Quite frankly, it is easy to sign on the dotted line of a commercial agreement. Especially when you are starting a new business about which you are understandably excited.
But it is foolish to do so when you run the risk of running into costly difficulties later on, and find that you cannot assign or sub-let or you are staring at an eye watering rent increase through the rent review.