Dealing with Assignments and Subletting's

Question 1

How to check if Is Assignment or Subletting permitted?

Answer 1

• Check the alienation provisions in the lease
• Normally assignment is permitted with LL consent not to be unreasonably withheld or delayed (1988 L&T Act)
• Subletting of the WHOLE is usually permitted (not part)

Question 2

What is the difference between an assignment and a subletting?

Answer 2

• With assignment, original tenant is no longer liable under the lease. - With sub-letting, original tenant remains liable but creates new relationship with sub-tenant. Landlord and sub-tenant have no direct relationship. 

-Tenant transfers legal interest in lease to another tenant. Incoming tenant takes over lease obligations. 
- Assignment means that the tenant no longer has any obligation under the lease (unless there is an AGA) and has no direct communication with the landlord.

• Subletting is when the tenant creates another lease below theirs. They will receive income from the sub-tenant but will still be responsible for paying the landlord.
• Lease property from tenant, rather than Landlord. Original tenant maintains relationship with Landlord, and sub-tenant has relationship with original tenant.

Question 3

Why would a tenant would rather a Sub-let rather than assign?

Answer 3

• If market rent is higher than passing rent, then tenant could get profit rent 
• If they wish to reoccupy in the future

Question 4

What is the process for dealing with assignments/subletting’s?

Answer 4

1. Check the lease
2. Get an undertaking for Landlord costs from the assignee
3. What is the covenant strength of the proposed assignee/sub tenant?
4. What is the proposed rent, more than, same, less than?
5. Are there reasonable grounds to refuse consent? (could be for covenant strength, tenant mix reasons)
6. Subject to agreement a Licence for Assignment/Subletting will need to be drawn up

Question 5

What is the L&T act 1995 ?

Answer 5

• To pursue a former tenant under the Covenant’s Act a S17 notice must be served within 6 months of the arrears. If the former tenant settles the arrears then an overriding lease can be created.
• Replacing PRIVITY OF CONTRACT
• Deals with assignments ONLY (not subletting’s)
• Brought in AGA’s (Authorised Guarantee Agreements) to protect the Landlord
• Applies to only 1 assignment so if the assignee then assigns again to a new tenant you will lose the original covenant
• The code for leasing business premises says that and AGA should not be a condition of the Assignment UNLESS the proposed assignee is of a weaker covenant.

Question 6

According to RICS Code of Leasing Business Premises, when should AGAs be used? 

Answer 6

If assignee is of weaker covenant strength, does not have a suitable guarantor and does not pay a suitable rent deposit