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.

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