There are two ways to pass on a business lease rather than bringing it to an end; firstly assigning or selling the lease to someone else, and secondly underletting, or creating a new relationship where you take on a new tenant whilst staying a tenant to your own landlord. Together, these are known as alienation. You will need to check your lease in order to comply with any requirements set out by the landlord (normally requiring that you gain consent in writing), but the law also sets out some rules which make these more tenant-friendly.
There are three types of clauses, or ‘covenants’, which can apply to alienation;
- Absolute (i.e. ‘the tenant will not assign’);
- Qualified (i.e. ‘the tenant will not assign without consent’); and
- Fully qualified (i.e. ‘the tenant will not assign without consent, not to be unreasonably withheld’).
Obviously, a landlord wants his lease to be full of absolute covenants, as this keeps him in control of the property, whilst the tenant wants to ensure that the landlord cannot refuse requests without a good reason.
If the covenant against alienation is absolute, then the landlord can refuse any request. This type of covenant is usual in leases which have already been assigned or sublet, or leases which are only for a short period of time.
If the covenant against alienation is qualified, the law automatically upgrades it to a fully qualified one. This means that the landlord cannot refuse a request to assign or underlet without good reason. Case law has stated that the reason must relate to the landlord/tenant relationship. For example, the fact that the proposed under-tenant is on the verge of going bankrupt and might not be able to pay his rent is a fair reason for refusing, but the fact that the landlord is a Manchester United fan and his proposed under-tenant a City fan does not relate to the legal relationship and so the landlord couldn’t refuse consent on this ground alone.
In ‘new’ leases (i.e. those made after 1 January 1996), the landlord is permitted to decide beforehand on a set of reasons which are automatically reasonable and therefore allow him to refuse the alienation. He can also decide on conditions which must be adhered to by both the old and new tenants. These must be written into the original lease, and can be the source of much debate! Common reasons relate to other business leases in the same development (for example, the landlord may not want two coffee shops in the same building), and standard conditions include the need for the old tenant to act as guarantor for the new tenant (and therefore pay the rent if the new tenant goes into debt).
You will need to ensure that you get a Licence to Assign/Underlet from your landlord. This sets out their consent in writing, and is useful to all parties as it sets out who is responsible to whom for rent, and ensures that everyone knows exactly what they have agreed to.
The articles in this blog are for guidance only and should not be taken as legal advice. If you would like to further discuss a legal issue please call us on 01752 309090.