Procedural Steps for the Assignment of a Lease

Question 1

What is an assignment of a lease, and how does it differ procedurally from a freehold sale?

Answer 1

• Definition: An assignment is the transfer of an existing lease from the current tenant (assignor) to a new tenant (assignee).
• Key Differences from Freehold Sale:
  1. Lease Terms: Unlike a freehold sale, the lease terms are fixed and cannot be renegotiated unless the landlord agrees to variations, which is rare and at their discretion.

2. Landlord’s Consent: Most leases require landlord approval, formalized through a licence to assign.
3. Premium Payments: Assignments often have little or no capital value, so premiums are rare. If a premium is paid, it is usually nominal.
4. Focus on Lease Review: The assignee must review the lease to ensure it suits their needs, covering issues like remaining term, permitted use, and rent obligations.

Question 2

Why is landlord’s consent critical in the assignment of a commercial lease, and how is it obtained?

Answer 2

• Importance of Consent:
• Lease alienation covenants generally require landlord approval for assignments.
• Assigning without consent could:
• Breach the lease terms, exposing the assignor to liability.
• Lead to forfeiture of the lease by the landlord.
• Process to Obtain Consent:

1. Licence to Assign:
   * Drafted by the landlord’s solicitor and sent to the assignor’s solicitor.

• Specifies the landlord’s conditions for approval.

2. Financial Vetting:
   * Landlord reviews references, such as:
   * Assignee’s bank or employer.
   * Professional references (e.g., accountant).
   * Three years of audited accounts (if a company or self-employed).

• Ensures assignee’s ability to pay rent and meet covenants.

3. Time Limit:
   * Consent is often time-limited to account for changes in the assignee’s financial standing.

Question 3

What is a licence to assign, and what are its key provisions?

Answer 3

• Purpose: Formalizes landlord consent for the lease assignment.
• Key Provisions:

1. Grant of Consent:
   * Assignor receives consent to assign to the specified assignee, often valid for a limited time (e.g., three months).
2. Direct Covenant (Old Leases):
   * Assignee agrees to perform tenant obligations under the lease, extending liability to the landlord directly.
3. Authorised Guarantee Agreement (AGA):

• Assignor guarantees the assignee’s lease performance for post-1996 leases under the Landlord and Tenant (Covenants) Act 1995.

4. Payment of Costs: Assignor agrees to cover landlord’s reasonable legal and professional fees.
5. Guarantor Requirement: Landlord may require the assignee to provide a guarantor for additional security.

Question 4

How does the Landlord and Tenant (Covenants) Act 1995 distinguish liability for old and new leases in assignments?

Answer 4

• Old Leases (Pre-1996):
  1. Privity of Estate: Liability exists while the lease is vested in the assignee.

2. Direct Covenant: Landlord often requires the assignee to enter into a direct covenant to uphold lease obligations for the remainder of the term.
3. No Automatic Release: Assignor remains liable for lease obligations post-assignment.

• New Leases (Post-1996):
  1. Automatic Release: Assignees are released from future obligations upon re-assignment.

2. AGA: Assignor may remain liable through an AGA, which:
   * Guarantees rent and covenant performance.
   * Indemnifies the landlord against assignee default.

Question 5

What steps must the assignor and assignee take during title investigation in a lease assignment?

Answer 5

• Assignor’s Obligations:
  1. Provide evidence of leasehold title (official copies if registered).

2. Supply the lease and any previous licences for assignment.
3. Disclose relevant incumbrances affecting the lease.

• Assignee’s Solicitor Investigations:

1. Review lease terms for:
   * Remaining term.
   * Rent and permitted use.
   * Alienation provisions (e.g., landlord consent requirements).
2. Investigate superior title:
   * Registered Freehold: Check official copies for restrictive covenants, easements, or charges.

• Unregistered Freehold: Require deduction of title if the lease is not registered with absolute title.

Question 6

What pre-completion searches are required in a lease assignment?

Answer 6

• Registered Lease:
  1. OS1 Search: Confirms no new entries on the leasehold title and secures a priority period for registration.
• Unregistered Lease:
  1. Land Charges Search: Verifies no adverse entries against the assignor since the pre-exchange search.
• Additional Searches:
  1. Company Search: Conducted if the assignor or assignee is a corporate entity, ensuring solvency.

Question 7

How are covenants for title managed to address liability concerns in lease assignments?

Answer 7

• What Are Covenants for Title?
• Definition: Covenants for title are implied promises made by the assignor (seller) to the assignee (buyer) regarding the lease being assigned. These promises are part of the transfer deed and relate to the assignor’s rights and obligations concerning the property.
• Key Promises in Covenants for Title:
  1. Right to Assign: The assignor has the legal right to transfer the lease.

2. Freedom from Undisclosed Charges or Incumbrances: No undisclosed burdens (e.g., mortgages or easements) affect the lease.
3. Compliance with Tenant Obligations: The assignor has complied with all tenant covenants in the lease, such as repairing and maintenance obligations.

• Why Do Covenants for Title Create Liability Concerns?
• Potential Assignor Liability:
• If the assignor is in breach of a tenant covenant (e.g., failing to maintain the property), the assignee could claim compensation post-completion based on the covenants for title.
• Example: If the property is in disrepair, the assignor may be liable for repair costs even after the transfer.
• Conflict with Caveat Emptor (Buyer Beware):
• The assignee is responsible for checking the physical state of the property before completion.
• However, the implied covenants for title could contradict this principle if the assignor is held accountable for repairs.
• How Are Covenants for Title Managed to Address Liability Concerns?
• Modification of Covenants for Title:
• The covenants for title in the transfer deed are modified to exclude liability for breaches relating to the property’s physical state.
• Example Clause:
• “The covenants set out in section 4 of the Law of Property (Miscellaneous Provisions) Act 1994 will not extend to any breach of the tenant’s covenants in the lease relating to the physical state of the property.”
• Where to Insert the Clause:
• TR1 Form (Panel 9 or 11): For registered leases, the modification clause can be added to these panels.
• Deed of Assignment: For unregistered leases, the clause is added directly into the deed.
• How Do Standard Conditions in Contracts Handle Covenants for Title?
• Standard Conditions of Sale (SCs) and Standard Commercial Property Conditions (SCPCs):
• Both provide for modifications of covenants for title in the contract, ensuring assignors are not liable for breaches related to the physical state of the property.
• The final transfer deed must also explicitly include the modified wording.

5. Practical Steps for Assignor and Assignee:

• Assignor:
• Ensure the transfer deed includes the modification clause to limit liability.
• Disclose the property’s physical condition to avoid disputes.
• Assignee:
• Conduct a thorough physical inspection of the property (caveat emptor principle).
• Review the lease terms for repairing obligations and ensure they align with expectations

Summary:
Covenants for title are implied promises by the assignor that they have the right to assign the lease, the lease is free from undisclosed incumbrances, and tenant obligations have been met. To mitigate liability, these covenants are typically modified to exclude responsibility for breaches related to the property’s physical state. Both assignors and assignees should carefully address these covenants during the assignment process.

Question 8

What documents and payments are exchanged during completion of a lease assignment?

Answer 8

• Assignor Provides:
  1. Lease.
  2. Executed transfer deed (TR1 or deed of assignment).
  3. Licence to assign signed by the landlord.
  4. Insurance policy and rent receipts.
• Assignee Provides:
  1. Purchase price and apportioned amounts for rent and outgoings.

2. Executed counterpart licence to assign.

Question 9

What post-completion steps are required for a lease assignment?

Answer 9

• SDLT/LTT:
• Payable on the purchase price if applicable, but not on rent (already taxed at lease grant).
• Registration:
• Registered Lease: Apply for registration within OS1 priority period.

*Unregistered Lease (Over 7 Years): Register within two months; failure renders the transfer void as to the legal estate.
* Unregistered Lease (7 Years or Less): Incapable of registration, but notice of assignment may be lodged against the freehold.

• Notice to Landlord:
• Lease provisions typically require notice of assignment to be given.
• Notice is sent in duplicate with the required fee, and acknowledgment is requested for record-keeping.

Question 10

How are apportionments handled during a lease assignment, and why are they important?

Answer 10

• Definition: Adjustments made for rent or outgoings paid by the assignor for periods after completion.
• Process:
  1. Assignor provides a completion statement showing calculations for reimbursement.

2. Assignee verifies calculations using receipts or demands provided by the assignor.
3. Payment is made as part of the completion process.