Your business has outgrown your rental unit but, there is still time to run on that commercial lease and you don’t or can’t terminate?
Assigning a commercial lease is one of the ways tenants can end a lease early: a halfway house between terminating and sub-letting where the entirety of the existing lease is transferred to a 3rd party. However you need to be careful as a lease is a legal contract and your landlord can take you to court if you break it.
Every Commercial lease is different and it is imperative to assess exactly what requirements there are in connection with an assignment. So if you are faced with a potential assignment of a lease, here are some things to consider:
Check That Commercial Lease:
First consider the “alienation” section of the lease as this details the circumstances upon which consent may be withheld and the conditions that the landlord can impose as a term of granting consent. It is also good practice to check that all covenants have been complied with.
Details Of The Proposed Tenant:
You would never dream of entering into a business arrangement without proper research and the same rule applies here: find out about your new tenant! Ask for references, bank details and professional references as a minimum.
Ability To Pay Rent:
Pretty understandably, the ability of a new tenant to pay rent will be high on a list of landlord priorities when deciding whether to give consent. A rent deposit is usually a good start. A landlord can also insist on a guarantor if there is uncertainty and a he/she may be included in the Licence to Assign to back up the obligations of the assignee.
Authorised Guarantee Agreement:
Prior to 1/1/1996 tenants were generally liable by “privity of contract” which enabled a landlord to go back to the original tenant for payment of rent arrears which had accrued long after that tenant had sold the lease.
This liability no longer applies as a result of The Landlord and Tenant (Covenants) Act 1995. Commercial leases entered into after 1/1/1996 usually contain provisions which enable the landlord to call upon the outgoing tenant to sign an authorised guarantee agreement. This ensures that the outgoing tenant guarantees the performance of the incoming tenant.
If the commercial lease has a registered title then you will need to use a Land Registry form TR1. This is only likely if the lease was originally granted before 13/10/2003 for a term of more than 21 years, or after 13/10/2003 for a term of more than 7 years. If the lease is unregistered but there is more than 7 years remaining on the lease then it will need to be registered on a TR1 at HM Land Registry.
If you transfer an existing registered commercial lease then this transaction needs to be registered on a form AP1. If an existing unregistered lease with a term of more than 7 years remaining is assigned then this needs to be registered using a form FR1.
If either party to the transaction is not represented by a solicitor or licensed conveyancer then the Land Registry requires evidence of identity for each unrepresented person (on a form ID1). You can download these forms from the Land Registry website.
If the price paid for the assignment exceeds £40k then the purchaser will need to submit a Land Transaction return (form SDLT1) to HMRC following completion. Stamp Duty Land Tax will also apply if the price paid is more than £150,000 (as long as it is not residential).
If the new tenant wishes to alter the premises and/or change use then licences may be required. A change of use may also require separate planning consent.
Final Words On Assigning A Commercial Lease
Commercial leases are often long, complicated documents so if you have any doubt, get specialist legal advice. We can get you the specialist legal advice you need by giving you a range of free quotes from commercial property lawyers. Get your free quotes by clicking below.