Assignment of a Lease – How to get out of a Commercial Lease early
Jun 30, 2020 | Shakeel Mir
There are plenty of reasons why you might want to exit your commercial lease early. Perhaps your current premises are no longer suitable for the needs of your growing business, or maybe your business is in financial difficulty and you need to find a lease with more favourable terms. There are also plenty of options when it comes to deciding how to exit a lease before the specified end date. Some of the most common include: assignment of a lease, which involves passing the lease onto another business; terminating the lease, with the help of a break clause if your contract contains one; or subletting your premises and adopting the role of landlord yourself.
Unfortunately, exiting a lease early is not always a simple process. A lease is a legal contract, and if you break it your landlord could take you to court. Opting to pursue a process such as assigning the lease to a new tenant can make exiting a lease early possible, but there are many factors that should be considered before beginning this process.
If you are thinking of trying to leave your lease early, it is advisable to obtain independent legal advice from an appropriately experienced commercial property solicitor before taking any action. If you would legal advice or assistance on getting out of a commercial lease please call us on 0800 086 2929, email firstname.lastname@example.org or complete our Free Online Enquiry Form.
What is assignment of a lease?
The process of assignment of a lease is essentially selling the lease to a third party (the “assignee”).
If you are a commercial property tenant, your contract likely contains a clause that allows you to assign your lease to a new tenant. To do this, you will need to find a potential new tenant yourself. Your landlord will expect this new tenant to meet the same expectations they originally set for you, and you will probably need their consent before the assignment can be completed.
While your landlord cannot reasonably withhold their consent for the assignment, they are under no obligation to give their consent if the new tenant doesn’t meet the terms set out in your contract – so it’s wise to be picky yourself about the tenant you select.
There are likely to be restrictions around when and if you can assign your lease specified in your contract. Some common restrictions include not allowing lease assignments if the contract is for a short period, and not allowing the lease to be assigned if the lease is ending within a few years.
Once a lease as been assigned, the assignee will become the new tenant and will be responsible for ensuring compliance with all of the tenant’s obligations in the lease.
What checks will a landlord make before permitting assignment of a lease?
Before consenting to the assignment of a lease to a new tenant, your landlord will want to carry out checks to ensure the tenant you have found is a suitable replacement. These checks can include:
• Financial status: your landlord will want to see evidence – usually in the form of business bank account statements – that the new tenant is in a strong financial position
• References: statements from previous landlords that the tenant has leased property from will be required to show that the tenant is reliable and doesn’t have a history of missing payments or otherwise neglecting their responsibilities as a tenant
• Proposed use of the premises: your landlord will probably be looking for a new tenant to intend to use the premises in broadly the same way as you have done in the past as the lease will specify what use is allowed.
• Likelihood of requesting alterations to the building: as above, your landlord will require advanced notice of any alterations the new tenant may wish to make to the premises, and in some cases written permission in the form of a Licence to Alter will be required. It’s likely that they may withhold their consent for assigning the lease to any tenant intending to make large-scale changes depending upon the type of premises involved.
What liabilities will you have when assigning a lease?
It is important to recognise that the assignment of a lease to a new tenant does not automatically exempt you from all liabilities related to that tenancy going forwards. In fact, once the lease assignment is complete you can still be liable should the new tenant miss any payments or otherwise break the terms of their contract.
Exactly what you will be liable for depends on when your lease began. If your lease began before January 1996 you will remain liable for all payments by any subsequent tenants – even if the lease is assigned several more times after you. This is called “privity of contract”.
For leases that began after January 1996, you will be required to sign an Authorised Guarantee Agreement. This means you guarantee payments for the next tenant, but not any further tenants.
Landlords can only claim payments of rent within six months of the money being due, and only after full notice has already been served to the former tenant.
What does lease assignment cost?
There are a number of costs involved in lease assignment, and these can vary depending on the specific circumstances of your lease. If the rent under the new lease is above the market rate, you may have to pay a premium to the new tenant to offset these costs.
On the other hand, if the rent under the new lease is below the market rate, the new tenant may instead want to pay you a premium. If this is the case, you’ll need to make a decision on whether to charge VAT – or “opt to tax” – something that’s worth getting professional advice on.
A final charge to be considered is the cost of this advice. It is highly recommended to involve your solicitor when opting to pursue a lease assignment so as not to inadvertently break the terms of your contract and leave yourself open to court action. You should therefore also factor solicitors’ fees into your calculations when considering the cost of exiting your lease.
How to get out of a commercial lease: what are the alternatives?
Assignment of a lease is not the only way to get out of a commercial lease and depending on your circumstances and the contract you have with your current landlord, it may not always be the best option. Some alternative ways to get out of a commercial lease early include:
• Using a break clause: some lease contracts include a “break clause” which offers both parties the opportunity to end the lease early in certain circumstances. Read your contract carefully to check if it contains a clause like this, and if it does, what terms and conditions are involved. Any time limits specified in the lease for giving of notice must be strictly followed.
• Negotiating a lease exit: if your contract does not include a break clause, your landlord may still be open to you exiting the lease early. You would need to negotiate the specific terms of your exit and your landlord may require a pay-out to offset the inconvenience of having to market the property again. Compared to lease assignment, negotiating an exit from your lease should provide a clean break with no further liabilities, but we would recommend seeking legal advice to confirm that you were exiting the contract cleanly.
• Subletting the premises: a final option to consider when looking at how to get out of your commercial lease early is subletting. If your contract allows it, you can take on the role of landlord by finding and leasing your property to a new tenant. You can use the rent payments from your new tenant to cover your own obligations, but in return you’ll be expected to take a hands-on role managing the property and dealing with the sub-tenant directly.
Need assistance with assignment of a lease?
Exiting a lease early can be a complex process, whether you choose to do so by arranging the assignment of your lease or by one of the other means mentioned above.
Lease assignment is an effective way for tenants to get out of a commercial lease early. However, this can be a slow process and you will incur costs. Contacting a solicitor at an early juncture is advisable so that you are appropriately advised at the outset of any key considerations and potential pitfalls. For example, even though you are selling the lease, you could potentially remain liable afterwards; this will depend on the age of the lease and whether you have entered into an authorised agreement or not.
Shakeel Mir is the Head of our Commercial Property department and has many years of experience in dealing with lease assignment. He is based in our Amersham office but assists and advises clients all over the country. In addition to office meetings, Shakeel offers remote meetings via telephone or video conferencing software so can assist you wherever you are based.
Make a Free Enquiry
If you are considering how to get out of a commercial lease or have any queries relating to any of the issues discussed in this article, please get in touch with Shakeel by calling 0800 086 2929, emailing email@example.com or completing our Free Online Enquiry Form.
The content of this article is for general information only. The information in this article is not legal or professional advice. If you require legal or professional advice you should obtain independent expert advice from qualified commercial property solicitors such as those within our firm.