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Tuesday, 31 May 2011

Assignment Conditions – What Should You Agree In A New Lease?

What should you look for if you are a tenant negotiating assignment conditions in a new commercial lease?

In my recent post on How to Assign a Lease etc I looked at what conditions typically have to be satisfied when seeking your landlord’s consent to assign your lease.

When negotiating the terms of a new lease – if you are a tenant – you should try to end up with as few conditions as realistically possible in order to make things easier for you if you ever decide you want to assign your lease to someone else later on.

However, ending up with a lease which allows you to assign at will is unlikely to happen, even in today’s market.

So what is realistic?

2007 Lease Code

However, the Code is not mandatory. Not all landlords will choose to offer Code-compliant leases, but the Code aims to promote fairness and ensure that small business especially are aware of the issues and have the information necessary to negotiate the best deal available to them.

The Code says that leases should:-

·         Allow tenants to assign the whole of the premises with the landlord’s consent not to be unreasonably withheld or delayed; and

·         Not refer to any specific circumstances for refusal –although the Code accepts that any group company of the tenant taking an assignment, when assessed together with any proposed guarantor, must be of at least equivalent financial standing to the assignor (together with any guarantor of the assignor).

“Financial standing” is not defined however, so if that term is used in a lease it might result in confusion or argument.

Assignments within a corporate group

Notwithstanding what the Code says about assignments to group companies, the position on assignments within a corporate group has been made more difficult since 2007 following the decision in the Good Harvest case and a subsequent decision at the end of 2010, currently awaiting appeal.

Landlords are now more likely to try and set strict financial conditions to be met before group company assignments are permitted, or even to ban those assignments altogether.

Here is a link to my previous posts on Good Harvest if you want to read more.

Authorised Guarantee Agreements (AGAs)

An AGA is a guarantee of your assignee’s obligations. My previous post on assignments explains this further.

It’s something your landlord may insist that you give on any assignment.

It’s potentially onerous because it means your supposedly ex-landlord can come back to haunt you by requiring you to pay the rent again if the new tenant fails to do so, and could even require you to take the lease back in place of the errant new tenant. Not a nice surprise when you’ve assumed your involvement with those premises was history.

The Code makes various suggestions that an AGA should only be required where the assignee is of lower “financial standing” than the assignor, or where it is “financially weaker”, and suggests that for “smaller tenants” a rent deposit might be more suitable. However, none of those terms is defined.

If the landlord wants to have some ability to require an AGA, it is simpler just to say that an AGA will be provided where “reasonably required” by the landlord – which avoids using terms that on the face of it might appear more precise, but actually aren’t.

You might also be able to include provisions in the AGA that will allow you to cancel it if defined conditions are met or after an agreed period.

Other conditions

The Code suggests that you try to make sure that the only precondition for assignment is the landlord’s consent in writing (which will be given in a licence to assign) and that the landlord may not unreasonably withhold or delay giving its consent (although that is implied by law anyway).

Whether it is realistic to expect to end up with no other conditions will depend on your bargaining position – how keen (desperate) is the landlord to have you as a tenant? The landlord may be looking to strike a hard bargain and choose to ignore the Code altogether.

I mentioned in my previous post on this subject some of the other kinds of conditions you might meet.

For example, it is common to have a condition that your assignee provides a contractual guarantee to the landlord. If you have to agree to this, try and say the landlord can only ask for one of those guarantees where it is “reasonable” to do so.

The Code specifically says that the landlord should not impose any condition which requires you to be in compliance with the lease at the time of the assignment.

That is very good advice and the rationale is the same as for break clause conditions – you don’t want your landlord to be able to refuse consent to assign just because you have committed some minor breach of a repairing obligation, for example.

Depending on the deal, the landlord may insist on assignees providing a rent deposit, bank guarantee or some other form of security. If that has to be agreed, then try and qualify it by reference to “reasonableness”.

Will you have to pay anything?

You should only be obliged to pay the landlord’s reasonable legal costs incurred in connection with granting its consent to the assignment.

You should resist any obligation to pay a price or premium to the landlord for being allowed to assign.

Watch out too for any attempt to exclude section 144 of the Law of Property Act 1925 – a sneaky way to try to hoodwink the unsuspecting tenant, or its advisor! It is rare these days for leases to try and do this, but I have seen some which do. Provided section 144 applies, the law doesn’t allow the landlord to charge a premium for its consent.

I wonder what would happen if section 144 were excluded and the landlord tried to insist on the payment of a massive premium in return for its consent? The tenant might be able to argue that the amount of the premium was unreasonable – but you don’t even want to go there.

It goes without saying – but I’ll say it anyway! – that you need to take professional advice when negotiating assignment conditions and if you can, it’s a good idea to try and address as many of these issues as possible at heads of terms stage.

Tuesday, 17 May 2011

Lease Break Clauses – Get Your Own Name Right!

Yes it’s time to refuel your collective paranoia on the subject of break clauses again!

I’ve posted a number of times on this topic, and you can view those earlier posts here.

I looked at things that can go wrong when, as a tenant, you serve a break notice in my post Lease Break Clauses – What Can Possibly Go Wrong?

However I was recently reminded of another mistake it is possible for a tenant to make when serving a break notice – which is to serve it in the wrong name.

So this time, rather than getting the landlord’s name wrong, or sending it to the wrong address, I’m looking at what happens when the notice is served in the name of someone other than the tenant (and that person is not the tenant’s agent).

This happened in a case last year - Hexstone Holdings v AHC Westlink Ltd [2010] EWHC 1280 (Ch). The tenant had gone through a merger and announced it would be taking the same name as its parent company. The landlord subsequently sent out rent demands in the name of the parent company, but the change of name was never formalised. The tenant served a break notice in a letter on its parent company’s headed notepaper “for and on behalf of” the parent company.

The lease required notice to be given by the tenant. The fact that the landlord had demanded and received rent from the parent company was not sufficient to imply the parent company had authority to act on behalf of the tenant. The letter showed a different company number from that of the tenant, so the earlier announcement of a name change was irrelevant.

The court decided the notice had been given by the wrong person and was therefore invalid – which meant that the lease had to continue for the rest of the term.

Another expensive mistake.

The test the courts use is whether a reasonable recipient of a notice would be likely to be misled by the error.

Crucial in this context will be whether or not the break right is personal to the tenant (that is whether only the named tenant can operate the break clause, not its assignees).

Recent commentary by Sandi Murdoch in the Estates Gazette [7 May 2011] (which I cannot link to as it is behind a paywall) says that where the break right is personal, an error in the name is a mistake that could not mislead the landlord - the party named cannot end the lease and so the landlord must know that a mistake has been made and will not be confused by the notice – so the notice is valid. Kind of makes your brain hurt that, but I see what he means (I think).

But where the break right is not personal, getting the name wrong is likely to be fatal to the notice (as in Hextone) because the party named might be an assignee (albeit one who became one without the landlord’s consent) that can legally exercise the break, or it might not. The landlord will therefore be unsure who is trying to end the lease, so the notice will be usually be invalid.

You know what? Easier just to get it right in the first place!

By the way, none of this prevents someone who is genuinely an agent of the tenant from validly serving a break notice – but you do have to be able to prove that the agency exists.

Be careful out there people!

Wednesday, 4 May 2011

How To Assign A Lease – Can You Do It? Can Your Landlord Stop You? How Do You Do It?

Moving on – what are the options?

There are many reasons why you might want to move on from your commercial premises.

They may be positive reasons – your business is expanding rapidly and your current premises are now too small or have become unsuitable, perhaps because you've taken on more people or adopted new processes or machinery.

Or the reasons may be more negative – you need to downsize, or you can no longer afford the rent.

What are your options?

You might be lucky enough to have a right to break the lease.  

Here's a link to my posts on what you need to think about when serving a break notice and the need to make sure you get it right.

Or you might decide to sublet – either because you can't find someone to take an assignment of your lease or you only want to offload part of your premises.  

Here's a link to my posts on subletting.

Why assign?

If you want to move out of your premises altogether and there's no pending break date, then your best option might be to assign your lease, if you can find someone to take it on.

Assignment means transferring your lease to someone else.

It's often better than subletting because you're no longer directly responsible for paying the rent and observing and performing the terms of the lease. That responsibility passes to the person you've assigned your lease to – your “assignee”.

One caveat though - you might still be indirectly responsible if your assignee defaults (more on that below).

Are assignments allowed?

First check your lease carefully. 

Assignments will usually be dealt with in a specific clause, sometimes called “alienation” - or it might more sensibly be labelled “dealings” or “transfers”.

If your lease doesn’t say anything at all about assigning, then that means it's allowed and your landlord’s consent isn't required.  However, check if there's a covenant against “parting with possession”, as that would also prevent assigning.

If there's an absolute ban on assigning, you will only be able to assign if your landlord agrees.  

Where there is an absolute ban, your landlord has an absolute discretion, doesn’t have to be reasonable, and can impose any conditions it wants.

Most commercial leases permit assignment, although there are some more “bespoke” leases, for example ones in which the rent (perhaps based on turnover) and terms are very specific to a particular tenant, which can't be assigned.

What do you have to do?

Commercial leases usually provide that you first have to get your landlord’s written consent to an assignment.

Your lease will usually go on to say that your landlord’s consent mustn't be unreasonably withheld, but even if it doesn’t, if your lease says your landlord’s consent must be obtained, the law implies that that consent can't be unreasonably withheld or delayed.

The consent process will usually involve you entering into a formal licence to assign with your landlord.

It's likely that your lease will also require you and your assignee to satisfy other conditions before the assignment is allowed.

What those conditions are will first depend on when your lease was granted.

If your lease was granted before 1 January 1996 then the law said the original tenant remained potentially liable for payment of the rent and observing and performing the other lease covenants for the whole term, even if the lease had been assigned many times. This is the indirect responsibility I referred to above.

In those leases, sometimes still called “old leases” by lawyers, because the landlord has the comfort of original tenant liability – and the potential liability of successive assignees – for the duration of the term, the main requirement will be to get landlord’s consent and enter into the licence to assign.

For many years the traditional investment model required a 25 year lease term, and so there are still many “old leases” in existence. Terms of that length are less common nowadays.

What's an AGA?

Leases granted on or after 1 January 1996 – still sometimes called “new leases” – don't make the original tenant potentially liable for the whole term because the law was changed from that date.

To compensate landlords (a bit) for that change, the law allows landlords to require an assigning tenant to enter into an “authorised guarantee agreement” (usually referred to as an “AGA”) under which the outgoing tenant guarantees the obligations of its immediate assignee, but not any future assignees (remember leases might possibly be assigned several times during their lifetime).

There's therefore still some indirect responsibility under “new leases” following an assignment, but it's more limited than under “old leases”.

So if your lease says you must give an AGA, then you have to do so, whether it's reasonable or not.

If the lease is silent, then your landlord can still require an AGA if it's reasonable for him to do so.

Does my guarantor also have to enter into the AGA?

You might have provided your landlord with a guarantor when you entered into your lease, for example a guarantee from a more powerful group company or a personal guarantee from directors.

The guarantor will have been required to enter into the lease and assume obligations set out in the lease which would take effect if you defaulted.

Can your landlord insist on your guarantor also entering into an AGA -   either (a) to guarantee the obligations of your assignee, or (b) to underwrite your own AGA obligations?

The short answer, is (a) no and (b) yes. These posts give more background.

Might there be other conditions to comply with?

Yes, there may well be.

Check the terms of your lease.

If it's an “old lease” it cannot specify what would be a “reasonable ground” for refusing consent to assignment – that is a matter for the court. The lease will just say the landlord’s consent must not be unreasonably withheld.

But old leases often contain pre-conditions that have to be satisfied before the assignment can take place – the most common being getting a direct covenant with the landlord from the assignee (which is given in the licence to assign and will last for the duration of the term); and a requirement for the assignee to provide a third party guarantee, also for the duration of the term.

There may also, less usually, be one or two other conditions - for example requiring the tenant to make an offer to surrender the lease to the landlord first.

“New leases”, on the other hand, can spell out any number of circumstances where it would be “reasonable” for the landlord to say no and conditions that must first be satisfied.

For example the lease might prohibit assignments to group companies.

Or it might require the assignee to satisfy certain profits and assets tests to show it is good for the rent.

There might be a prohibition on assigning to companies based outside the jurisdiction.

There might be a prohibition on assigning to certain competing businesses (although because of recent legislative changes competition law might now step in to outlaw some of those restrictions).

“New leases” also commonly require the assignee to procure a third party guarantee, as with old leases, but in this case the guarantee will not necessarily last for the whole term but just during the time that the assignee is the tenant.

These are just some examples. Your lease might impose other conditions as well – so look at it carefully.

When is it reasonable for your landlord to say no you can’t assign?

This applies to the general condition requiring you to get landlord’s consent in “new leases” as well as the standard consent provision in “old leases”.

If the covenant strength of your proposed assignee is poor, or the landlord has reasonable grounds for thinking your assignee will commit substantial breaches of covenant, then it might be reasonable for your landlord to refuse consent to the assignment.

In “new leases”, your landlord will also be able to refuse consent if the other assignment conditions set out in the lease haven't been met.

Can you assign part?

The vast majority of commercial leases that reserve a market rent – or “rack rent” - as opposed to a nominal ground rent, prohibit assignments of part, which means you can’t do so.

Generally speaking, you will have to sublet if you want to offload only part of your premises (and only then if your lease allows you to do so).

Leases of large areas at nominal ground rent (such as leases granted by local authorities) might permit assignments of part, but that's outside the remit of this post.

What can and what must your landlord do when you apply for consent to assign?

Where your lease allows you to assign, subject to getting your landlord’s consent, the Landlord and Tenant Act 1988 (the 1988 Act) imposes obligations on your landlord:-

·         To respond within a reasonable time
·         To give its decision in writing
·         To consent unless it is reasonable not to do so
·         Not to impose unreasonable conditions
·         To specify any conditions subject to which consent is given
·         Where consent is refused, to give the reasons
·         To pass on the application to anyone else (e.g. a superior landlord) whose consent is required.

It's for your landlord to show that it has acted reasonably.  If consent is withheld or delayed unreasonably, you as tenant (but not the assignee) have a statutory claim for damages.

Generally as a rule of thumb your landlord ought to respond to your request to assign within 28 days, however this isn't a statutory period and circumstances may mean that this is an unreasonably long time for your landlord to take.

Can your landlord demand a solicitor’s undertaking to have its costs paid before doing anything?

It's usually reasonable for a landlord (or its legal advisor) to ask for an undertaking for its reasonable costs to be paid. However, your landlord or its advisors shouldn't postpone dealing with your application while waiting for the undertaking.  Any delay might mean your landlord is in breach of its obligation to respond promptly under the 1988 Act.

Can your landlord demand payment for its consent to assign?

Other than reasonable legal and other fees, your landlord cannot normally demand a payment for consent to assign.  The two exceptions are:-

·         If there's a ban on assignments in the lease, in which case your landlord has an absolute discretion whether to allow it and can name its price; or
·         If your lease excludes section 144 Law of Property Act 1925 (but that’s rare).

Can you get round all this?

Generally speaking, no.

Waiting for a landlord’s licence to assign, notwithstanding the landlord’s statutory duties needs to be factored into your business plans.

You need to be realistic about timing, as it’s not all in your hands where third parties (namely landlords and their advisors) are concerned. You can try and exert some pressure and of course remind them of their statutory duties if they are dragging their feet, but there’s no point getting too emotional right at the outset – it’ll only upset them and send your blood pressure through the roof.

Update 28/8/12
This post has been revised since it was first published.