You take a lease. You may have to accept the lease term – the number of years – which the landlord is insisting on granting. They may only be willing to grant a lease to tenants who will accept a long lease term. Or you may be starting up the kind of business which needs a long lease term – a business where the premises themselves are a crucial factor, such as restaurants, bars and some shops.
For one reason or another you may wish – or need – to get out of that lease earlier than expected, and long before the lease term itself comes to an end.
In that case, you’ve probably got two ways to go: underletting or assignment. Underletting (or subletting) means to let the premises yourself by creating a new lease (in this case, an underlease) to your own tenants for a lease term less than what is remaining of your own lease term .
That’s actually fairly unusual, because most tenants who are wanting to get out of their premises just want to draw a line under it. They are not wanting to have their own landlord and tenant relationship going forward. Not only is that a hassle, but there is very little profit in it. If rents are rising sharply, it’s true that you might be able to underlet for a year or more at a higher rent than you are paying yourself. But that will end at the next rent review. At that point the rent under both leases will be assessed to open market rent and therefore the same rent. Then you will still be locked into having to manage the underlease, perhaps even forced to take action against your undertenant in order to comply with the terms of your own lease. So, underletting is not terribly attractive as a business proposition.
Assignment
The most likely action you will take if you want to get rid of the premises, is to assign the lease. “Assign” is a technical legal term for the transfer of ownership to replacement tenants, whether you sell the lease and make some money or simply transfer it over to them for nothing.
Your lease will have quite a few pages devoted to the rules and requirements governing any such assignment. I am setting out what is very often the case, but you have to check the actual provisions of your own lease because they may be different. Like handprints, they are all similar but each one is unique. What follows is what is normal to find in leases. To find out what applies to you and your premises, you must rely on specific legal advice on them, not on this overview.
The lease will say that you can only assign the lease to new tenants if the landlords give their written consent.
This doesn’t mean the landlords can decide only to approve prospective tenants if they belong to the right club and go to the church on Sundays. It means checking whether they are adequate to replace you as tenants.
This does not lie entirely in the landlords’ hands. They’re not allowed to make arbitrary decisions. The technical wording you will probably see in the lease is that “the landlord’s consent must not be unreasonably withheld or delayed”. The landlord is compelled to grant consent unless they have a “reasonable” objection to the incoming tenants.
If the landlord persists in refusing consent, you have the right to take the matter to a court to decide. Courts have access to a vast library of decided cases on what is or is not “reasonable” in these circumstances, so it’s very far from being just a lottery whether you win or not. Your lawyers will be able to give you some measure of certainty before you start any such legal action; and the landlords lawyers will be advising them on whether it’s worth their while to defend such a case.
However, the law does allow landlords to set out in the lease a number of circumstances in which they cannot be compelled to grant consent – and with these circumstances, reasonableness does not come into it. For example, landlords may be able to refuse assignees which are of less financial strength than the existing tenant.
The landlords may also be entitled to impose certain conditions on the assignment – things that you or the assignee must do. Depending on the financial strength of the assignee, the landlords may be entitled to require them to lodge a rent deposit as security.
They may be entitled to require individual guarantors, particularly if a company is being put forward as the assignee.
The landlords may be entitled to require you as the outgoing tenant to enter into an “authorised guarantee agreement” – an “AGA” – under which you unfortunately have to guarantee the incoming tenants while they are still tenants. This guarantee could be in force until the end of the lease term if your assignees stay until then. But if they assign in turn, then they must give the landlords an AGA in respect of their own assignees, and you will be automatically released from your AGA obligations at that point.
In light of your potential obligation to give an AGA for assignees, it’s very important that you make sure the incoming tenants are a solid reliable business or person because you are financially at risk if they fail.
Request the landlord not to require an authorised guarantee agreement unless the assignee is financially weaker than you are. Try to arrange for the incoming tenant to provide a rent deposit instead. Seek to negotiate an arrangement with the landlords under which you will be released from your AGA if certain conditions are met, such as your assignee proving to be a reliable payer for a specified period period of time, or, in the case of a company, that it’s published profits exceed a certain figure.
This is only an outline of typical situations. The full details of all the circumstances, conditions, and permutations that actually apply to you will be in your lease. It is important that you do consider them from the start, because you may well be able to renegotiate some of them before you sign it. Landlords’ solicitors will tend to include every weapon in the arsenal, but landlords themselves aren’t necessarily concerned to over-protect themselves, if you take issue with something while you are negotiating the lease. For example, try to avoid any requirement for an assignee company to have to provide personal guarantees from directors, because they will be most unwilling to do that. If you accept unreasonable restrictions at the start, they may make it impossible for you to assign the lease at all, thus forcing you to stay put.
Your solicitors should refuse to approve circumstances in which consent can be refused which are unreasonable, such as where there are any breaches of tenants’ obligations in the lease, even trivial ones. It might be fair to require that your rent is fully up to date before you can assign your lease, but it would be unreasonable to refuse consent because you have not repainted a bedroom door.
Underletting
If you are proposing to grant an underlease, which, as I’ve said above, is far less likely, similar rules apply but with some additional ones as well. It will usually be required by your lease that any underlease will be in the same or similar terms, to mirror the obligations in your own lease, and also that it will be granted “outside the act” (even if your own lease is “inside the act”).
Sometimes, landlords try to make it a condition of any underletting that you don’t let for less than the rent you are paying on your lease. You should seek to avoid that, because you may be having to underlet at a time when the market rent is lower than what you’re paying. In fact, is quite likely. Otherwise, you’d be assigning the lease. The condition you want is that you won’t let for less than market rent.
Sharing
Where there are several companies in a group of companies, the group may want to change the company which holds the lease to another company within the group. If the landlords accepted the original company as tenant because of its financial strength, they will not be willing to see it replaced by a worthless company. Landlords often provide in the lease that inter-company transfers can only happen where the new company is of similar financial strength to the existing company.
Sometimes, head office want other companies within the group to use or share the premises. Leases sometimes permit this provided that the arrangement does not create a tenancy to the sharing company or companies. Other than sharing with companies in the same group as the tenant, leases normally prohibit tenants from sharing their premises with anyone else.
If you are taking a lease of a large retail unit, you may want to have the right to grant concessions over parts of the floor area from time to time. You need to make sure that the lease permits this, because otherwise it would be prohibited sharing of occupation.
Charging
Finally, leases sometimes restrict the ability of tenants to mortgage or charge the lease. Leases, especially short leases, are usually not of much value as security for a loan. But many lenders insist on taking charges over all a business’s assets. So, it can upset the loan requirements if you cannot charge the lease to the bank. Your solicitors should make sure there is no restriction on your ability to mortgage or charge the lease.