Alienation

Question 1

Qualified covenants against assignment

Answer 1

A tenant’s covenant against assignment of whole may be qualified, meaning that assignment is only allowed with the landlord’s consent.
However, s19(1)(a) of the Landlord and Tenant Act 1927 converts a qualified covenant into a fully qualified covenant, meaning that the landlord must act reasonably if deciding to withhold consent. This restricts the landlord’s discretion.
Furthermore, s1 of the Landlord and Tenant Act 1988 goes a step further, and states that the landlord must give its decision on consent within a reasonable time.
Again, note that statute affects different provisions differently. Alienation is the area where the law comes down most heavily in favour of the tenant. This is because it is unfair to bind a tenant to the lease and premises where there is a willing and suitable prospective tenant to take over.
Case law suggests that a “reasonable time” is dependent upon circumstances but should be measured in days or weeks instead of months.

Question 2

When is it reasonable to withhold consent?

Answer 2

There is a large body of case law on when it is reasonable for the landlord to withhold consent. The details of this are beyond the scope of this course, but here are some examples.
· 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.a
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).
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.

Question 3

Privity of contract

Answer 3

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.

Question 4

Privity of estate

Answer 4

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.

Question 5

The assignor’s and assignee’s liabilities after assignment

Answer 5

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.

Question 6

New leases

Answer 6

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.

Question 7

Authorised guarantee agreement

Answer 7

Landlords of old leases were used to being able to rely on privity of contract to treat the original tenant as an effective guarantor. This stopped with new leases.
However, the statute provides a mechanism whereby the original tenant can agree to guarantee the obligations of the incoming tenant. This is done by a document called an authorised guarantee agreement (often abbreviated to AGA).
Many commercial leases will make it a condition of assignment that the outgoing tenant enters into an authorised guarantee agreement. If the lease is silent, then the landlord can only insist on an AGA if it is reasonable to do so (eg, if the tenant’s ability to pay the rent is in doubt).
Whereas an original tenant’s liability under an old lease extended for the whole of the lease term, an outgoing tenant only guarantees the next tenant under an AGA.
If there is a subsequent assignment, then the outgoing tenant’s liability under the AGA ends.

Question 8

Pre-exchange

Answer 8

Landlord’s solicitor
· 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
Tenant’s solicitor
· 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.
Assignee’s solicitor
· 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.

Question 9

Pre-exchange – consent application

Answer 9

The tenant’s solicitor will usually apply to the landlord for consent early on in the transaction, as the whole transaction hinges on this being successful.
The landlord’s solicitor will ask the tenant’s solicitor to give an undertaking for costs. The tenant’s solicitor will want to ensure that they are in funds (ie, have money in client account from the client to cover the undertaking).
The undertaking will typically cover the landlord’s solicitor’s and surveyor’s costs in considering the application. It will be capped at a certain amount (say up to £850 plus VAT for each of the solicitor’s and surveyor’s costs).
Once the undertaking has been provided, the landlord’s solicitor will draft a licence to assign (this will be covered in a separate element). Although a short document, both the tenant’s solicitor and assignee’s solicitor may have amendments that they wish to make, so it may take time for all three parties (landlord, tenant and assignee) to agree its final form.
Key word or definition: An undertaking for costs is a promise by a solicitor to pay costs. Breach of the undertaking may lead to disciplinary action by the Solicitors’ Regulation Authority, and as a solicitor is an officer of the court, their undertaking is also enforceable in the courts.

Question 10

Pre-exchange – draft contract and lease

Answer 10

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).

Question 11

Pre-exchange – investigation of title, searches and enquiries

Answer 11

The tenant’s solicitor will deduce their leasehold title, and the assignee’s solicitor should investigate it. If the lease is unregistered, this would include investigating the landlord’s title, but if the lease is registered, then the assignee’s solicitor can rely on the leasehold official copies.
The assignee’s solicitor will raise CPSE1 enquiries (as does a buyer’s solicitor in a commercial freehold transaction) but will also raise CPSE4 enquiries which are specific to the assignment of a lease.
The assignee’s solicitor should raise the same searches as they would if they were buying the freehold.
In general the assignee’s solicitor should ideally exercise the same care over their investigations with a leasehold transaction. In practice, the assignee may agree with their solicitor that the cost of full investigations are not justified for a very short lease with limited repair and other obligations. In this case, the assignee’s solicitor should ensure that the assignee is advised of the risks.

Question 12

Exchange

Answer 12

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)

Question 13

Pre-completion

Answer 13

Landlord’s solicitor
· Engrosses licence to assign in triplicate (three copies), arranges for landlord to execute one copy
Tenant’s solicitor
· 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
Assignee’s solicitor
· Arranges for assignee to execute one copy of the licence to assign
· Obtains funds from assignee needed to complete as per completion statement
· Raises requisitions on title
· Raises pre-completion searches
· Drafts deed of assignment

Question 14

Pre-completion steps

Answer 14

The tenant’s solicitor prepares a completion statement for the assignee. This involves calculating what proportion of the rents due under the lease are attributable to the tenant and the assignee.
Example: A tenant assigns a lease halfway through the current quarter, and has paid a full quarter’s rent in advance. The completion statement will require the assignee to pay half of that quarter’s rent to the tenant.
As with a freehold transaction, pre-completion searches are carried out if the lease is registered. The appropriate search is an OS1 search of the whole of the tenant’s leasehold title. Note that it does not matter here if it is a lease of part or whole, as it is not the landlord’s title being searched.
The landlord will prepare the licence to assign in triplicate, as each of the landlord, tenant and assignee will want a signed copy at its completion.
The assignee will draft the deed of assignment. If it is a registered lease, this will be in form TR1, as for a registered freehold. If the tenant’s solicitor is happy with the draft, then they will arrange for the tenant to execute it. The landlord is not involved in this.

Question 15

Completion

Answer 15

On completion of the assignment
* the assignee’s solicitor sends the tenant’s solicitor the completion monies
* the landlord’s solicitor, tenant’s solicitor and assignee’s solicitor agree over the telephone to complete and date the licence to assign
* the tenant’s solicitor and assignee’s solicitor agree over the telephone to complete and date the deed of assignment

Question 16

Post-completion

Answer 16

Assignee’s solicitor
· Arranges to submit SDLT or LTT return and pay appropriate SDLT or LTT if necessary
· Registers assignment if necessary
· Sends formal notice of assignment to landlord’s solicitor

Question 17

Underletting

Answer 17

Underletting is another form of alienation. Unlike assignment, the tenant does not pass its leasehold interest on entirely, but instead grants an underlease to an undertenant.
The underlease must be for a shorter term than the lease itself, even if only a day shorter.
Following an underletting, the tenant remains the tenant of the landlord, and must pay the rent and ensure that the other obligations are performed.
The tenant, however, receives a rent from the undertenant which the tenant may use to pay therent under its own lease.
The tenant can also enforce the undertenant’s covenants to ensure that the tenant does not fall foul of its own covenants to the landlord.

Question 18

Why an underletting?

Answer 18

A tenant may want to underlet the premises if:
* they are not using all of the premises, and it is possible to underlet the part they are not using
* they do not need the premises at the moment, but are likely to do so in future
* they cannot find a willing assignee, but can find a willing undertenant
If the lease is silent, then the tenant is free to underlet. However, a commercial lease will impose a requirement of consent, and will want to vet prospective undertenants. Underlettings of part may be permitted if it is practical to separate the premises.

Question 19

Qualified covenants against underletting

Answer 19

A tenant’s covenant against underletting of whole may be qualified, meaning that underletting is only allowed with the landlord’s consent.
As with assignment (see the relevant element), a qualified covenant against underletting is automatically converted to a fully qualified covenant and the decision must be made within a reasonable time.
A commercial lease may contain an absolute covenant against underlettings of part, except for a permitted part (such as the floor of an office building in the previous example), and a fully qualified covenant against underlettings of the whole or a permitted part.
The considerations for what constitutes reasonable withholding of consent are similar to that for assignment. The landlord is equally concerned with the ability of the undertenant to pay the rent and perform the obligations of the lease as in certain instances the undertenant may become the direct tenant of the landlord.
Unlike assignment, lease covenants regulating underletting do not talk in terms of conditions and circumstances on which consent may be reasonably withheld. The transaction is somewhat less risky for the landlord in that the tenant remains primarily liable for observing the covenants under the lease.
However, the landlord is able to restrict the underletting, and will normally do so in a commercial lease. These restrictions are concerned with what would happen if the undertenant becomes the direct tenant of the landlord.
Typically the lease will prevent the tenant from underletting the premises:
* together with property that do not belong to the landlord
* on payment of a lump sum (as doing so likely means that the tenant is not paying a full market rent)
* with a rent free period beyond what is normal in that market
and may require that the underlease:
* is at a rent no lower than that in the tenant’s lease (but this makes it difficult for the tenant to underlet in a falling market)
* contains covenants no less onerous than in the tenant’s lease

Question 20

Privity of contract

Answer 20

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 contract exists between the landlord and the tenant.
· It also exists between the tenant and the undertenant.
· However, it does not exist between the landlord and the undertenant.

Question 21

Privity of estate

Answer 21

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.
· Privity of estate exists between the landlord and the tenant.
· It also exists between the tenant and the undertenant.
· However, it does not exist between the landlord and the undertenant.

Question 22

The undertenant’s liabilities to the landlord

Answer 22

As there is neither privity of contract nor privity of estate between the landlord and the undertenant, the landlord is not able to enforce covenants against the undertenant.
· The landlord will therefore usually want the undertenant to covenant directly with the landlord.
· A direct covenant can be given by the undertenant to the landlord in the licence to underlet (for detail, see the element on licences to assign and underlet).
· There is no equivalent of an authorised guarantee agreement for underletting, as the tenant remains liable to the landlord in any case.
Tip - underletting terminology
Underletting terminology can be confusing, as it is relative.
For example, you can talk about the landlord, tenant and undertenant. Alternatively you can refer to the same individuals as the headlandlord, landlord and tenant respectively.
Either is fine – just be careful to be consistent, and make sure in an assessment question that you understand the relationship between the parties, however they are described.
To add to the confusion, you can also see subletting, sublease and subtenant in place of underletting, underlease and undertenant. The sub- prefix can be used interchangeably with under- here, although again it is best to stay consistent.
For the purpose of this and subsequent elements, the terminology landlord, tenant and undertenant is adopted.

Question 23

Pre-exchange

Answer 23

Landlord’s solicitor
· Takes instructions
· Considers application to underlet
· If landlord is happy in principle to give consent, requests undertaking for costs and issues draft licence to underlet to tenant’s solicitor
Tenant’s solicitor
· Takes instructions
· Applies for consent to underlet
· Prepares draft lease and, if relevant, agreement for underlease (ie, if there is to be an exchange)
· Reviews draft licence to underlet and sends copy to undertenant
· Deduces title and responds to any queries on title
· Answers pre-contract enquiries
· Once agreed, engrosses the agreement for underlease, obtains the tenant’s signature and sends counterpart to undertenant’s solicitor
Undertenant’s solicitor
· Takes instructions
· Reviews draft lease and agreement for lease and amends as required
· Reviews draft licence to underlet
· Investigates title and raises any queries on title
· Raises pre-contract enquiries and searches
· Arranges for undertenant to sign counterpart lease

Question 24

Pre-exchange – consent application

Answer 24

As with assignment, the tenant’s solicitor will usually apply to the landlord for consent early on in the transaction, as the whole transaction hinges on this being successful.
The landlord’s solicitor will require the tenant’s solicitor to give an undertaking for costs before beginning work. Once the undertaking for costs is in place, the landlord’s solicitor will prepare the draft licence to underlet.
The landlord’s solicitor will also want to see the draft underlease to ensure that it will comply with the tenant’s obligations under the lease.

Question 25

Pre-exchange – drafting the underlease

Answer 25

The tenant’s solicitor will need to draft the underlease.
Unlike a freehold owner granting a lease, a tenant granting an underlease is usually very limited in what provisions they can offer. For example, the tenant’s lease will usually require the underlease to contain obligations no less onerous than the tenant’s (eg, if there is a full repairing covenant in the lease, there must also be a full repairing covenant in the underlease).
The underlease may be a full form lease, which will look similar to the tenant’s own lease, or it may be a lease by reference, which incorporates sections of the tenant’s lease by reference (eg, it may define the “tenant’s covenants” as the tenant’s covenants in the tenant’s lease, and then contain a covenant for the undertenant to observe the tenant’s covenants).
The term granted by the underlease must be less than the remaining term of the tenant’s lease, even if only one day less.

Question 26

Pre-exchange – agreement for underlease

Answer 26

As with a grant of lease, it is not always necessary to have exchange at all. If exchange does take place, then the tenant’s solicitor will draft an agreement for underlease.
As with an agreement for lease, this may set the completion date in the future and may make the completion conditional on various matters.
Example: The tenant has applied to the landlord for consent to the underletting. The consent application is taking a long time through no particular party’s fault, but both tenant and underlessee are anxious to commit themselves to the underletting.
They may exchange an agreement for underlease conditional upon the landlord’s consent, allowing them to complete as soon as the landlord is ready to give it.

Question 27

Pre-exchange – investigation of title, searches and enquiries

Answer 27

The undertenant’s solicitor should generally carry out the same investigation of title, searches and enquiries as the tenant’s solicitor in a grant of lease (see the element on grant of lease procedure).
However, one important difference is that rather than the landlord deducing its freehold title, the tenant will need to deduce its leasehold title as follows:
* if the lease is over 7 years, then the tenant need only provide an official copy of its registered leasehold title;
* if the lease is 7 years or under, then the tenant will need to provide an official copy of the landlord’s freehold title together with a copy of the lease.
As with the grant of lease, it is possible that the undertenant may not want their solicitor to do full scale investigations if it is a short term letting.

Question 28

Exchange

Answer 28

On exchange of an agreement for underlease:
* the tenant’s solicitor and undertenant’s solicitor exchange in similar manner as for a freehold contract (usually adopting Law Society B)
* no deposit is usually payable
* the agreement for lease may set a fixed completion date, but more likely will set out what conditions need to be satisfied and by when for completion to take place
* the agreement for underlease will usually have a draft of the agreed form of underlease annexed to it, so it can only be exchanged once the terms of the underlease have been agreed

Question 29

Pre-completion

Answer 29

Landlord’s solicitor
· Engrosses agreed form of licence to underlet and circulates for execution
Obtain’s landlord’s execution to licence to underlet
Tenant’s solicitor
· Prepares original and counterpart underlease, obtains tenant’s signature to original and sends counterpart to undertenant for signature
· Prepares and sends a completion statement, detailing the money due on completion (eg, any apportioned annual rent, service charge and insurance rent)
· Obtains tenant’s execution to licence to underlet
Undertenant’s solicitor
· Arranges for undertenant to sign counterpart underlease
· Obtains funds from client needed to complete as per completion statement
· Raises pre-completion searches
· Obtains undertenant’s execution to licence to underlet

Question 30

Pre-completion steps

Answer 30

A completion statement will be prepared, just as with a grant of lease. Note that it is the rent under the underlease that is payable, however, not the rent under the tenant’s lease.
The underlease will likely require an appropriate sum from the undertenant for service charge and insurance rent to cover the corresponding obligations of the tenant.
If it is an underletting of the whole of the tenant’s interest, then an OS1 search is carried out against the tenant’s registered leasehold title. If it is an underletting of part of the tenant’s interest, then an OS2 search is carried out against the appropriate part of the tenant’s registered leasehold title.
Where the underlease is not registrable, an OS3 search may be carried out against the tenant’s interest to check whether any adverse entries have been made since the date of the last copy of the tenant’s title register. It would not be appropriate to carry out a search with priority against the landlord’s freehold interest, as the underlease is not granted out of the freehold.
Assessment tip: There are slight differences with the pre-completion steps for a grant of lease, assignment of lease and underletting. It is easier to think about and understand the differences than try to learn the pre-completion steps for each type of transaction.

Question 31

Completion

Answer 31

On completion of the underlease
* the parties’ solicitors agree to date and complete the licence to underlet
* the undertenant’s solicitor sends the tenant’s solicitor the completion monies
* the tenant’s solicitor and undertenant’s solicitor agree over the telephone to complete and date the executed underleases that they are holding
* the tenant’s solicitor and undertenant’s solicitor send the completed original and counterpart underleases to each other

Question 32

Post-completion

Answer 32

Tenant’s solicitor
· Sends notice of underlease to the landlord’s solicitor
Undertenant’s solicitor
· Arranges to submit SDLT or LTT return and pay appropriate SDLT or LTT if necessary
· Registers underleases if necessary

Question 33

Licences and different forms of alienation

Answer 33

An assignment or underletting by the tenant will require the landlord’s consent. A commercial lease will typically require that any consent is given by deed (except in limited circumstances). The deed that gives the consent is the licence for assignment or licence for underletting as appropriate.
The requirement of consent to be in a deed is safer from the landlord’s point of view because it lessens the risk that the landlord inadvertently consents to something that it doesn’t mean to! Nonetheless, the landlord’s solicitor should take care not to say anything that could be construed as consent (even in principle) on behalf of the landlord. It also ensures that the tenant’s covenants and any variations to the lease are given the requisite formality.
The licence will usually contain a time limit on consent, so that the appropriate underletting or assignment must be completed within, say, three months. This avoids uncertainty on the part of the landlord, who will not want the process to go on indefinitely. In practice, the licence is usually completed just before completion of the transaction itself.
Unlike a licence for alterations, which contains numerous obligations about the work that is to be carried out, there are comparatively few obligations in a licence to assign or licence to underlet.
If the licence is for assignment of an old lease or an underletting, the licence will contain a direct covenant by the assignee or undertenant to the landlord to comply with the tenant covenants in the tenant’s lease.
A direct covenant to the landlord is not strictly necessary with the assignment of a new lease, but the landlord may want it anyway. If the outgoing tenant on an assignment is giving an authorised guarantee agreement (see element on assignment), then this may be contained in the licence to assign, or it may be a standalone deed.
Assessment tip: Make sure you are clear on the liability of the parties to the landlord after an underletting, an assignment of an old lease, or an assignment of a new lease, and where the authorised guarantee agreement is appropriate (only for the assignment of a new lease).

Question 34

Provisions in licence to assign and underlet

Answer 34

Common to both licence to assign and licence to underlet
· Consent for limited time (say 3 months) and limited to specific transaction
· Tenant agrees to pay landlord’s costs
· Assignee or underlessee covenants directly with the landlord to observe lease obligations (not necessary in a licence to assign a new lease, but landlord may request anyway)
Different for different types of licence:
· Tenant guarantees assignee’s performance of tenant obligations (authorised guarantee agreement) – licence to assign new lease only
· Tenant not released from outstanding obligations – licence to assign new lease only (not necessary for old leases or underlettings)
· The draft licence to underlet will have a draft of the underlease attached

Question 35

Notice of dealing

Answer 35

Following an assignment, the assignee, and following an underletting, the tenant, will be required to give the landlord formal notice within a month that the transaction has been completed.
There will usually be a fee for the landlord’s solicitors receipting this notice.
For a long residential lease, it is often the case that the lease may be freely assigned (eg, on a sale of the house or flat), or underlet on short tenancies, without landlord’s consent.
However, there will usually be a requirement to give notice of dealing for assignments of the lease. This is mainly so that the landlord for the time being knows to whom they should address the ground rent demands!

Question 36

Different forms of alienation

Answer 36

Assignment and underletting are not the only forms of alienation. There are other ways in which the tenant may be able to deal with their interest. This slide looks at charging the lease and sharing occupation.
Charge
A tenant may create a charge over their lease, just as a freeholder owner charges their interest to a mortgage lender.
A commercial tenant may do this as part of a floating charge over their business generally. The bank taking the charge will want the benefit of the lease if taking the business into administration.
A residential leaseholder will do this when taking a mortgage.
Share occupation
A tenant may want to share occupation with a third party without creating an underlease.
Usually a commercial lease will allow sharing with group companies.
This is because from the landlord’s point of view, they can regard the tenant and its group companies as one entity – the landlord can still enforce the covenants against the tenant.

Question 37

2020 Code for Leasing Business Premises

Answer 37

The Code has various requirements on alienation. Some important ones:
* Lease should allow tenants to assign or underlet the whole of the premises with the landlord’s consent not to be unreasonably withheld or delayed
* Leases should allow tenants to share with group companies without consent.
* Leases should allow tenants to charge the lease to a bank or reputable lending institution without consent (with a limited exception).