7 - Alienation Flashcards
What is Alienation?
Alienation simply means a disposal of all or part of the tenant’s interest in the lease. Assignment is one form of alienation.
What is Assignment?
The grant of a lease creates a leasehold interest. Just as a freehold interest may be sold or transferred to a new owner, so a leasehold interest may be sold or transferred.
We speak of the lease being assigned by the existing tenant (assignor) to the new tenant (assignee). As with a freehold, the assignee may pay for the leasehold interest, or the consideration may simply be the assignee agreeing to pay the rent and perform the other obligations of a tenant under the lease.
What happens following assigment - i.e., who are the parties to the lease?
Following assignment, the landlord becomes the landlord of the assignee.
The new tenant is now entitled to exclusive possession of the premises, and is obliged to pay the rent and perform the other tenant covenants.
The assignor is no longer entitled to use the premises, and generally need not pay the rent or perform the other tenant covenants. However, the assignor may still have liability for them, as we will see.
Why might a tenant choose to assign a premesis?
A tenant may want to assign the premises if they no longer need them for the purposes of their business or cannot afford to keep paying the rent (perhaps following a rent review).
If the premises are right for the assignee, conversely, they may be only too happy to take the lease.
If the lease is silent, then the tenant is free to assign. In practice, a commercial lease will likely require that before assignment, the tenant apply to the landlord for consent. The landlord will want to be able to vet potential assignees.
How can a covenant against assignment be drafted?
A tenant’s covenant against assignment may be drafted as absolute, qualified or fully qualified.
An absolute covenant means that assignment is not allowed. A commercial lease will usually contain an absolute covenant against assignment of part of the premises. The landlord will not want a letting split into parts, which creates various problems.
How does the law govern qualified covenants against assignment in leases?
A tenant’s covenant against assignment of the whole may be qualified, allowing assignment only with the landlord’s consent.
Landlord and Tenant Act 1927 (s19(1)(a)): Converts a qualified covenant into a fully qualified covenant, requiring the landlord to act reasonably when deciding to withhold consent, limiting the landlord’s discretion.
Landlord and Tenant Act 1988 (s1): Requires the landlord to give a decision on consent within a reasonable time.
Tenant Favouritism: The law heavily favours the tenant in alienation cases, as it’s considered unfair to bind a tenant to a lease when a suitable tenant is available to take over.
Reasonable Time Interpretation: Case law indicates that a “reasonable time” should be measured in days or weeks, not months, depending on circumstances.
When is it reasonable for a landlord to withhold consent for assignment?
· The would-be assignee’s proposed use of the premises may be reasonable grounds to withhold consent. For example, in a shopping centre, the landlord may have a policy on mixing different types of shops. If the prospective assignee’s proposed use does not fit this, then it may be reasonable to withhold consent.
· The landlord cannot withhold consent on grounds not related to the landlord/tenant relationship, such as a personal dislike of the prospective tenant or their business. Nor can they discriminate on grounds of race, sex or disability.
· It is likely reasonable to withhold consent if the landlord has justifiable concerns about the assignee’s ability to pay the rent; for example, if the tenant cannot produce satisfactory references. Another example would be if the assignee is newly incorporated and cannot produce accounts.
What will happen if the landlord does not act reasonably in withholding or delaying consent for assignment?
If the landlord does not act reasonably in withholding or delaying consent, then the tenant may be able to claim damages (including costs for agents and solicitors).
How can a landlord protect themselves about assignment concerns in a commercial lease?
The landlord will, however, have various concerns regarding assignment.
A commercial lease, therefore, will contain:
* Circumstances that the parties agree will be reasonable grounds for withholding consent and
* Conditions that may be imposed on assignment.
Both conditions and circumstances are recognised by s19(1A) Landlord and Tenant Act 1927. If valid, they provide the landlord with specific grounds on which consent may be reasonably withheld.
Example: A lease’s assignment covenant includes a circumstance that all yearly rent is paid up to date, and a condition that the assignee provides a guarantor of the rent and other obligations. The landlord may reasonably withhold consent to the assignment if the tenant is behind with rent or if the assignee refuses to provide a guarantor.
What is the privity of contract and how does it compare to the privity of estate?
Privity of contract
At common law, privity of contract is the ability of the original parties to a contract to enforce the obligations against each other, even after the contract has been assigned.
Privity of estate
By contrast, privity of estate is the ability of the landlord and tenant for the time to enforce the provisions of a lease against each other. However, not all obligations are enforceable under privity of estate.
What are the assignor’s and assignee’s liabilities after assignment?
The common law position for old leases was that despite assignment, the original tenant remained liable to the landlord to pay the rent and perform the other obligations under privity of contract.
By contrast, there were only limited obligations that automatically passed to the new tenant under privity of estate, and the new tenant would have to covenant directly with the landlord to observe all the tenant’s covenants in the lease.
How did the Landlord and Tenant (Covenants) Act 1995 affect tenant liability in new leases granted on or after 1 January 1996?
The Landlord and Tenant (Covenants) Act 1995 changed the liability of the assignor and assignee to reflect better the commercial reality of the situation. The Act applies to leases granted on or after 1 January 1996, which are referred to as new leases.
When a new lease is assigned, the original tenant is released from liability, and all of the tenant covenants are passed to the new tenant.
What is the purpose and function of an Authorised Guarantee Agreement (AGA) in new leases?
An Authorised Guarantee Agreement (AGA) allows the original tenant of a new lease to guarantee the incoming tenant’s obligations when the lease is assigned, replacing the prior reliance on privity of contract in old leases.
Key points include:
Mechanism: The original tenant agrees to guarantee the obligations of the incoming tenant through an AGA.
Condition of Assignment: Many commercial leases require the outgoing tenant to enter into an AGA as a condition of assignment.
- If the lease is silent, the landlord can only insist on an AGA if it’s reasonable, e.g., if there are concerns about the incoming tenant’s ability to pay rent.
Limited Liability: Under an AGA, the outgoing tenant only guarantees the immediate next tenant, not subsequent assignees.
Termination of Liability: When the next assignment occurs, the outgoing tenant’s liability under the AGA ends.
For example, if A Ltd assigns the lease to B Ltd and gives X Ltd (the landlord) an AGA, X Ltd can pursue A Ltd if B Ltd defaults on rent. If B Ltd then assigns to C Ltd, A Ltd’s AGA liability ends, and X Ltd can only pursue B Ltd if C Ltd defaults.
Provide a summary of Assignment.
- Assignment means the existing tenant passing the lease to a new tenant.
- A commercial lease will generally restrict assignment of part with an absolute covenant, and assignment of whole with a qualified covenant.
- A qualified covenant against assignment is automatically upgraded to a fully qualified covenant, and it is also implied that the decision whether to grant consent is made within a reasonable time.
- Under an old lease (pre 1 January 1996), the original tenant remains liable following assignment, and the new tenant is only liable for certain matters (and will therefore have to covenant directly with the landlord)
- Under a new lease (1 January 1996 onwards), the original tenant is released from liability following assignment, and the new tenant is liable for all matters under the the lease.
- An outgoing tenant may be required to guarantee the assignee’s obligations under an authorised guarantee agreement.
What is the procedure for assigning a lease?
The procedure of assigning a lease is similar to a freehold transaction.
The procedure of assignment of a long residential lease (say 999 years), is almost identical to a freehold transaction, although there are some minor considerations (eg, although the landlord’s consent may not be required, it is usually an obligation to notify them of the assignment).
Our main concern, however, will be the assignment of a commercial lease. Although it is broadly similar to the freehold transaction, there are important differences, and it is common to skip the stage of exchange of contracts (as with the grant of lease procedure) and instead combine the pre-exchange and pre-completion steps together.
What steps does the landlord’s solicitor take pre-exchange of an assignment?
· Takes instructions
· Confirms receipt of application, sets out any requirements
· If client wishes to proceed in principle, drafts licence to assign and sends to tenant’s solicitor
What steps does the tenant’s solicitor take pre-exchange in an assignment?
· Takes instructions
· Applies for consent
· Prepares draft contract (if applicable) and deduces title. Forwards licence to assign to assignee’s solicitor.
· Answers pre-contract enquiries.
· Once agreed, engrosses the contract, obtains tenant’s signature and sends engrossment to assignee’s solicitor.
What steps does the Assignee’s solicitor take pre-exchange in an assignment?
· Takes instructions
· Assists tenant’s solicitor if anything needed for consent.
· Reviews draft contract (if applicable) and investigates title. Reviews and reports on lease. Reviews the licence to assign.
· Raises pre-contract enquiries and searches.
· Arranges for assignee to sign contract.
What is the process for obtaining landlord consent pre-exchange in a lease transaction, and what is the role of an undertaking for costs?
Consent Application: The tenant’s solicitor applies for the landlord’s consent early, as the transaction relies on this approval.
Undertaking for Costs:
- The landlord’s solicitor requests an undertaking for costs from the tenant’s solicitor, who must ensure funds are in the client account to cover this.
- The undertaking generally includes the landlord’s solicitor’s and surveyor’s costs, typically capped (e.g., £850 plus VAT for each).
Drafting the Licence to Assign: After the undertaking, the landlord’s solicitor drafts a licence to assign. Although brief, amendments may be requested by the tenant’s and assignee’s solicitors, potentially delaying final agreement.
Undertaking Definition: An undertaking for costs is a solicitor’s promise to pay costs. Breaching this may lead to disciplinary action, and the undertaking is enforceable in court.
Who will draft the lease for the assignment and when does this take place?
The tenant’s solicitor will draft a contract if it is intended to exchange (for example, if the parties are anxious to bind themselves to the assignment subject to the landlord’s consent).
The tenant’s solicitor deduces title by providing official copies for the leasehold title, or if it is not a registered interest (ie, a term of 7 years or less), then the landlord’s title. In either case, a copy of the lease will be provided to the assignee’s solicitor.
The assignee’s solicitor will review the draft contract and amend if they feel appropriate in the assignee’s interests. The landlord is not normally a party to this contract.
An important difference between the grant of lease and assignment procedure is that whereas a new tenant will have the opportunity to negotiate the lease, an assignee generally takes the lease as it is.
Only in rare instances (eg, if the landlord would prefer to have the assignee over the tenant) might the landlord agree to vary the lease (this would require a deed of variation).
What are the key steps for the tenant’s solicitor in investigating title, searches, and enquiries pre-exchange in a lease assignment?
Title Investigation:
The tenant’s solicitor provides evidence of leasehold title.
If unregistered, the assignee’s solicitor investigates the landlord’s title; if registered, leasehold official copies are sufficient.
Enquiries:
- The assignee’s solicitor raises CPSE1 enquiries, as in a commercial freehold transaction.
- CPSE4 enquiries, specific to lease assignments, are also raised.
Searches:
The same searches are raised as in a freehold purchase.
Care in Investigation:
Ideally, the same level of care is exercised as for a freehold. However, for short leases with minimal obligations, full investigations may be avoided if agreed upon with the assignee, who must then be advised of any risks involved.
What steps does the Landlord’s solicitor take pre-completion in an assignment?
· Engrosses licence to assign in triplicate (three copies), arranges for landlord to execute one copy
What happens on exchange of a contract for assignment?
On exchange of a contract for assignment
* The tenant’s solicitor and assignee’s solicitor exchange in similar manner as for a freehold contract (usually adopting Law Society B)
* No deposit is usually payable for assignment of a rack rental lease (for an assignment of a long residential lease, a 10% deposit would be usual, just like for a freehold)
* The contract may set a fixed completion date, or may specify that completion is conditional (eg, on the landlord’s consent)
What steps does the Tenant’s solicitor take pre-completion in an assignment?
· Arranges for tenant to execute one copy of the licence to assign
· Prepares and sends a completion statement detailing the money due on completion (eg, any apportioned annual rent, service charge and insurance rent)
· Responds to requisitions on title
· Approves deed of assignment and arranges for tenant to execute
