Alienation Flashcards
What is alienation?
The tenant’s ability to transfer all or part of their interest in the lease. This can be restricted by a clause in the lease. The tenant may be permitted to assign or sublet their lease, which gives them flexibility
What is assignment?
The process of a tenant transferring their new leasehold interest to a new tenant, who is then responsible for obligations under the lease, with the landlord’s consent.
It is likely that the lease will require the tenant to apply to the land for consent before assignment
Process of assignment
- The landlord becomes the landlord of the assignee (new tenant)
- The new tenant is entitled to exclusive possession and obliged to pay rent/perform tenant covenants
- The old tenant is no longer entitled to use the premises and does not need to perform tenant obligations
Qualified covenant against assignment
(s19(1)(a) LTA 1927) There is a statutory upgrade of a qualified covenant into a fully qualified covenant.
This requires the landlord:
- to act reasonably if deciding to withhold consent
- the landlord must give its decision within a reasonable time. Usually this is 28 days
- the lord must gives its decision in writing
If the landlord does not act reasonably in withholding or delaying consent, the tenant may be able to claim damages
What are reasonable grounds for withholding consent?
- unsatisfactory covenant strength - justified concerns about the assignee’s ability to pay
- proposed use would breach the lease
- business that competes with the landlord
- mixed-use policy
What are unreasonable grounds to withhold consent?
- Grounds that are not related to the landlord/tenant relationship, such as personal dislike or personal grievances
- Cannot discriminate
- Minor breach of repairing obligation
Circumstances and conditions
Commercial leases will contain:
- circumstances that the parties agree will be reasonable grounds for withholding consent
- conditions that may be imposed on assignment
Both conditions and circumstances are recognised by s19(1)(A) LTA and if valid provide grounds on which consent may be reasonably withheld
Liabilities after assignment for an old lease (pre-1996)
For old leases, the original tenant remained liable to the landlord to pay rent and perform obligations under privity of contract.
The outgoing tenant remains liable, and the incoming tenant is only liable if they covenant directly with the landlord
Liabilities after assignment for new leases
Under a new lease, the original tenant is released from liability and all the tenant’s responsibilities and obligations are passed to the new tenant. The incoming tenant automatically becomes liable.
However, under an AGA, the original tenant can guarantee the obligations of the incoming tenant. Many commercial leases will make it a condition of assignment that the outgoing tenant enter into an AGA
Why is it important to include an AGA as a condition of the lease (from the landlord’s perspective)?
If the lease is silent (and does not have an AGA as a condition), the landlord can only insist on this if it is reasonable, for example, the tenant’s ability to pay rent is in doubt
Who does the outgoing tenant guarantee under an AGA?
The outgoing tenant only guarantees its immediate successor. This means if there is a subsequent assignment, the outgoing tenant’s liability under the AGA ends
What is the difference between assignment and underletting?
Assignment is where a tenant transfers their entire leasehold interest to a new tenant, whereas underletting means the tenant grants a new lease (the underlease) to a third party, while remaining a tenant under the original lease.
In underletting, the existing lease remains in place, whereas in assignment it is transferred to another tenant.
- Assignment: the assignor (original tenant) is no longer the tenant after assignment. The landlord becomes the landlord of the new tenant (assignee)
- Underletting: the tenant remains the tenant under the original lease
What is underletting?
Underletting a lease is where the tenant (‘head tenant’) allows another person (‘sub tenant’) to occupy part or all of the property they are leasing, creating a lease within a lease. This means the existing lease stays in existence
- can underlet the whole or part
The head tenant remains responsible to the landlord, while the subtenant is responsible to the head tenant
What must the tenant do even after it has underlet its lease?
As the tenant remains the tenant of the landlord (in underletting), it must pay rent and ensure other obligations are performed
Why might a tenant want to underlet?
- If they are not using all of the premises
- They do not need the premises at the moment, but are likely to do so in the future
- They cannot find a willing assignee, but can find a willing undertenant
Qualified covenants against underletting
This is automatically upgraded into a fully qualified covenant. This means the landlord must act reasonably in deciding to withhold its consent and the decision must be made in a reasonable time
What are the limitations on underletting?
Unlike assignment, lease covenants do not regulate the conditions or circumstances on which consent may be reasonably withheld
This is because underletting is less risky, given the tenant remains primarily liable
What are common restrictions on underletting in a lease?
A lease may prevent the tenant from underletting the premises:
- together with property that does not belong to the landlord
- on payment of a lump sum
- with a rent free period beyond what is normal in the market
It may require the under lease:
- is it a rent no lower than the tenant’s
- contains covenants no less onerous than the tenant’s
What must the term of an underlease be?
- It must be for less than the remainder of the tenant’s lease
- It must be for a fixed term
Who does privity of contract and estate exist between in underletting?
- Landlord and tenant
- Tenant and under tenant
- It does NOT exist between landlord and under tenant
What are the undertenant’s liabilities to the landlord?
The landlord cannot enforce covenants against the undertenant (since there is no privity of contract or estate).
Therefore, the landlord will usually want the undertenant to covenant directly with the landlord (agree to perform its obligations under the lease). This is usually given in the licence to underlet
What is the licence to underlet and what is its purpose?
It is a document which records the landlord’s consent to underletting, allowing the tenant to lease the property to another tenant (the under tenant).
It also usually contains a covenant from the under tenant to comply with the tenant covenants in the lease. The subtenant will covenant to observe covenants of both the under lease and the head lease (except to pay rent of the head lease)
Landlord, tenant and under tenant enter into the document
- This creates privity of contract between the landlord and under tenant
What is privity of contract and why does it need to be established by licence to underlet (in underletting)?
Privity of contract means that only parties to a contract can enforce its terms or be held liable. This does not exist between the landlord and the under tenant, as the under tenant does not become a party to the original lease.
Without privity of contract, the landlord cannot enforce the obligations of the lease against the under tenant.
The licence to underlet creates privity of contract, allowing the landlord to enforce obligations and responsibilities against the under tenant, as the under tenant will covenant directly with the landlord in the licence to underlet.
When might a tenant consider assignment / advise a tenant client on the possibility of assignment?
A tenant may decide they no longer want the lease premises. If they have years left to run on the lease, they will continue to face rent and repair obligations. The tenant can try to find someone to take over the lease (assignment)
- If they are nearing the end of the tenancy or a break clause, they can simply wait for the lease to expire or exercise the break clause
- The landlord may agree to bring the lease to an early end, but is likely to demand a substantial sum
Assignment therefore allows the tenant to get out of the lease with relatively little cost
When might you advise a tenant client on the option to underlet?
- Tenant has a lease of several floors - they might want to underlet part (e..g, one of the floors)
- Tenant decides they do not need the premises for the next few years. They can under let until they then need the premises back
Alienation provisions in the lease
FRI lease will usually allow:
- Assignment of the whole, but not part
- Underletting of the whole, and may allow underletting of part
What is the procedure for applying for consent for assignment or underletting?
- Tenant’s solicitor make formal written application to landlord requesting consent (or their solicitors)
- Landlord’s solicitor will request an undertaking for costs from the tenant’s solicitor. This is to cover the landlord’s legal and surveyor costs
- Surveyor assesses covenant strength of proposed assignee or under tenant
Licences (to assign or underlet)
If the landlord gives consent, they will do so in a formal licence
- This formalises the landlord’s consent
- It creates privity of contract with landlord and assignee or under tenant (secure direct covenants)
What is found in a licence?
Common to both licence to assign and licence to underlet:
- Formal consent
- Time limit (must take place within prescribed time)
- Specifies the dealing - consent is specific
- Tenant covenants to pay landlord’s costs
What are features only found in a licence to assign?
- Authorised Guarantee Agreement from the outgoing tenant (for new leases). This means the outgoing tenant guarantee the obligations of the incoming tenant
- No release of tenant obligations
What features are only found in a licence to underlet?
- Draft underlease - it must be an agreed form
- Under tenant covenants to observe covenants of both leases (except to pay rent under the headlease)
How to advise a client (tenant) looking to strengthen their negotiation position to underlet part of the premises?
Negotiation with the landlord to grant tenant consent to underlet
- Is there any leverage? What can the tenant offer the landlord in return for the landlord giving its consent to underlet?
- Could offer a rental deposit as additional security for underletting
- Confirm that as tenant you would be paying all the landlord’s fees
- Remind the landlord that the tenant can exercise a degree of control over the sub-tenant
- Remind the landlord that you as tenant will remain ultimately liable for any damage caused or if they do not pay their rent
Who drafts the licence to underlet?
The landlord’s solicitor drafts the licence, and the tenant would negotiate and approve it
Who drafts the underlease?
The underlease is drafted by the tenant’s solicitor and is issued to the subtenant for approval. The underlease is entered into by the tenant and sub-tenant, but it must be approved by the landlord prior to completion
What costs does an undertenant bear in relation to an underletting?
It is usual for an undertenant to pay their own legal fees and other costs in connection with a underletting
What costs does the tenant pay in underletting process?
The tenant pays all the landlord’s fees in connection with the underletting. The landlord can recover these under lease in any event.
