Commercial Lease Assignment

Lease assignment means transferring a commercial lease to someone else. It is a part of commercial property law.

Commercial leases can change hands for a variety of reasons such as market conditions making business untenable, or in a happier turn of events a business may need to move to larger premises to suit demand. 

Assigning a lease can be a complex process, however, following the right legal processes can simplify the matter considerably.

Whatever the reasons for an assignment of a lease our network of commercial property solicitors is ready to guide you.

Contact our legal assessment team today to discuss your matter and get a personalised no-obligation quote.

What does assigning a lease mean?

Assigning a lease is when a tenant, also known as an assignor, transfers a lease and their legal interest in it to another party usually a business. The other party is known as the assignee.

The new tenant will have the same rights and responsibilities under the lease as the assignor when the transfer is signed and completed. 

In essence, assigning a lease means selling a lease to the assignee.

Your commercial lease may have a clause allowing the assignment of a lease, if you want to transfer your lease in this manner it will be your responsibility to find a new tenant to see out your lease.

When and why would you want to assign a lease?

There are many reasons to assign a lease. It could be that you are retiring and have decided to end your business, you may need new tenancy because you can no longer afford the rent in your current premises. Or, happily, you may be looking to expand as your business is thriving.

Another reason for an assignment of a lease is a rival business contacting a tenant stating that they would like to take over their lease, if the original tenant agrees an assignment of lease process would follow.

Who can assign a lease?

The following need to be involved in the assignment of a lease:

• The Landlord and their solicitor

• The current tenant (assignor) and their solicitor

• The proposed new tenant (assignee) and their solicitor

Are there any restrictions or limitations on who can assign a lease?

There may be restrictions or limitations in your lease specifying whether you can assign your lease. Short leases typically do not allow lease assignments.

Additionally, a lease that only has a few years left on it or is about to run out may not be transferable as per the lease agreement. 

You will need to read your lease’s wording carefully to determine if you are allowed to assign your lease and any restrictions or limitations that prevent you from doing so.

Our commercial property solicitors can assist you in understanding what your lease permits.

What checks will a landlord make before allowing the assignment of a lease?

Of course, a landlord wants a continuation of the lease without gaps to ensure they continue to receive rent.

However, before consenting to the transfer of a lease a landlord will need to do their due diligence to ensure prospective tenants meet their standards. Landlords also have obligations in commercial leases.

These checks are similar to those carried out by a landlord when they screen any prospective tenant.

The landlord’s solicitor will check the following related to the proposed incoming tenant, including:

• Financial status and affordability.

• References from previous landlords.

• How the premises will be used.

• Whether they need to make alterations to the premises (some landlords won’t accept tenants who want to make large-scale changes).

Landlords are advised to carry out the same in-depth screening processes that they would for any initial tenant screening. After these comprehensive checks have been carried out a landlord can be confident that they have mitigated their risk.

Why might a landlord refuse to consent to the assignment of a lease?

A landlord may refuse to consent to an assignment of lease if the assignee fails any of their screening checks.

For example, after examining the businesses’ bank statements, the landlord may decide that they won’t be able to afford the rent after their current obligations and outgoings have been taken care of. 

Or, they may receive a worrying reference from past landlords. This could include some concerning reports from late payment of rent to suspicious or illegal uses of the premises.

When a tenant wishes to make alterations to a property, they must inform the landlord before an assignment of a lease can go ahead. They may need written permission in some cases via a License to Alter.

When a new tenant wants to make significant changes to the layout of the premises a landlord may be inclined to decline the assignment because after the changes are carried out a landlord’s ability to attract future tenants may be limited.

What responsibilities come with lease assignment?

When a lease assignment has been completed the new tenant will have the same responsibilities the previous tenant did under the lease terms. 

This will include payment due dates and rules around maintaining the property.

How to assign a lease

Here’s how the process usually plays out:

1. An assignor instructs their solicitors that they would like to assign their lease

2. The assignee instructs their solicitors that they would like to take over the same lease

3. The assignor’s solicitors get in touch with the landlord’s solicitors regarding the agreed assignment requesting the landlord’s consent for the transaction.

As you might imagine, with three solicitors involved assigning a lease can get quite complex and time-consuming with different legal letters bouncing around between the three parties. 

How to register assignment of a lease

When an assignment of a lease is registered the new lease is valid, legally binding, and enforceable. This is a crucial step for landlords. The assignor must also register the lease if it has seven years or more left on the term. Again, the assignor needs to register the lease assignment if the lease has already been registered with the Land Registry.

To ensure that everything is legally above board, a landlord will need to submit a Deed of Assignment to the Land Registry that covers the area where their property is based.

The process involves completing the Land Registry form AP1 and paying the application fee. When the form is received, the new tenant’s name will be entered on the property title.

How much does it cost to assign a commercial lease?

The cost of assigning a commercial lease will vary with a few factors, including the complexity of the lease, the type of lease, the location, and how long is remaining on it.

The cost for a licensed solicitor to help with lease assignment is dependent on many factors including the complexity and specific requirements of the case. On average it is expected to range from £250-£300 but in some cases, it could cost as much as £500.

Alternatives to lease assignment 

If you want to end a commercial lease earlier than the specified end date you have some alternative options at your disposal.

What is a licence to assign?

A licence to assign is a legal document where a landlord gives the current tenant permission to transfer the lease to an incoming tenant.

Each party mentioned in the document will sign it. The permission doesn’t have to be granted in writing, however, a written document adds clarity to the terms of the agreement.

A written agreement means the assignor and assignee have to follow the conditions of the agreement, including paying rent and a deposit.

Actual assignments vs virtual assignments

The virtual assignment of a commercial lease is an arrangement where the actual lease itself is not transferred, only the obligations of the tenant. 

The differences between an actual assignment and a virtual assignment are clarified below:

Landlord consent is not required for a virtual assignment, whereas an actual assignment requires the consent of the landlord to go ahead.

Virtual assignments can be a good option for tenants who cannot opt for an actual assignment because of strict conditions in their lease.

Lease assignment vs subletting

Subletting is another way to transfer your lease to another person.

The crucial differences between a lease assignment and subletting are:

What clauses or requirements should be included in the assignment agreement?

It is important to ensure that the assignee can enforce their rights under the contract. The ability for the assignee to sue the assignor should be included in case things go wrong with the new tenancy which the previous tenant was at fault for.

The assignor should be able to be exempt from liability for any contract breaches made by the assignee. 

The assignor may want to include an indemnification clause to deal with potential issues that are created from the assignment.

A scope of assignment can also be included. These define the rights, obligations, and benefits being assigned to the new tenant.

It should also be specified whether the assignment relates to the entire contract or only parts of it. 

A consent and notice clause specifies that the agreement needs to be agreed by both parties. This will include how the process will work, will there be a written notice, for example? When will approval be given?

No assignment of burden clauses means that the new tenant cannot assign their obligations to a third party. The assignor will be liable for obligations not followed.

Limitation on assignment clauses restricts the number of assignments available on the lease. 

How does an assignment of a lease affect any guarantors or security deposits? 

Landlords should ensure that if a guarantor is required on the lease is not the same guarantor that was named for the previous tenant under the previous lease.

When a new lease is assigned the outgoing tenant’s guarantor is removed from their liability to the landlord. 

Tenants are typically required by landlords to sign an authorised guarantee agreement for the incoming tenant. These agreements guarantee the liabilities of the new tenant for the duration of the lease.

The assignment of a lease won’t impact security deposits. If an assignee offers the same guarantor as the assignee the landlord may require greater rent deposits. 

Are there any tax implications associated with the assignment of a lease?

The tax implications for the assignment of a lease will be determined by the length of the lease. 

For a long lease, to calculate Capital Gains Tax the original cost should be deducted from the proceeds of the sale. The profits are subject to capital gains tax. 

A lease with less than 50 years remaining is known as a wasting asset, wasting assets depreciate. To work out Capital Gains Tax you’ll need to use lease depreciation tables.

Can the terms of a commercial lease be renegotiated during the assignment process? 

Yes, the terms of a commercial lease can be renegotiated during the assignment process. The changes that the incoming tenant will be able to agree with the landlord will depend on their negotiating power.

What to do if there is a dispute during the assignment process? 

When disputes arise during the assignment process it’s important to be able to address them effectively so the transfer can be completed. 

You’ll need to first identify what’s causing the dispute. For example, is the assignee unhappy with the terms of the lease?

Then you can check the assignment agreement to see if it mentions anything about dispute resolution, for example, arbitration or mediation. These methods of alternative dispute resolution can help resolve the dispute amicably.

How can Lawhive help?

Our commercial property solicitors can guide you through the sometimes complex process of a lease assignment.

From registering a lease assignment to ensure the terms are legally binding, drawing up the terms of the agreement to liaising with the assignee and landlords’ solicitors we can help.

Contact us to book a free case assessment today and we’ll guide you on the best route forward. Our network of commercial property solicitors is ready to assist.