How do commercial lease assignments work?

If you’re a business tenant looking lease transfer or take over an existing lease from another business, it’s important to understand the process involved in lease assignments.

This process, known as a lease transfer, can be complicated and involve legal and practical considerations.

In this article, we will discuss lease assignments in detail, including the necessary steps and documentation required to complete the process.

Whether you’re a landlord or a tenant, understanding the process of lease assignments can help ensure a successful lease transfer.

What are the initial steps to take?

The first step is to look at the lease to see whether assignments are permitted. Most business leases allow assignments subject to certain conditions being met.

If these conditions are met, the landlord will grant their consent to the assignment. If you’re unsure about the conditions for the landlord’s consent, you should reach out to a commercial property lawyer at an early stage, who’ll be able to advise you.

You’ll then contact the landlord to establish the terms of their consent. The initial approach may be done directly in person, but the formal, legal request will typically be done through the solicitors.

What will the landlord need to see to grant consent?

It’s common for the landlord to request details of the incoming tenant (the ‘assignee’), including bank and trade references, type of business and financial accounts, etc.

In doing so, the landlord is trying to gauge whether the assignee can pay the rent and meet the other lease obligations.

If the landlord has doubts, for example, if the assignee is a start-up business with little or no assets, then the landlord will likely request additional security, such as a sizeable rent deposit, personal directors’ guarantees, etc.

What happens to the outgoing tenant?

The outgoing tenant is known as the ‘assignor’. It’s common practice for the landlord to ask for an Authorised Guarantee Agreement (‘AGA’) from the assignor as a condition of their consent.

An AGA is a legal document between the assignor and the landlord in which the assignor guarantees the assignee’s lease obligations for the remaining duration of the lease or (if earlier) until the date the assignee assign the lease.

What are the legal documents involved?

Several legal documents are involved in the process of assigning a lease, including:

• Deed of Assignment – the document which transfers the lease from the assignor to the assignee.
• Licence to Assign – the document signed by all three parties (landlord, assignor and assignee) legally confirms the landlord’s consent to the assignment.

Without this document, the assignment isn’t lawful and would be a breach of lease entitling the landlord to terminate the lease.

• Authorised Guarantee Agreement (‘AGA’) – a binding agreement made by the assignor and landlord, in which the assignor assures the lease obligations of the assignee for the remaining lease term, or until the assignee assigns the lease if that occurs sooner.

Who pays the legal fees?

It’s standard for the assignor to cover the landlord’s legal expenses for the lease assignment in addition to their own fees.

This is because the landlord isn’t at fault for the assignor’s decision to transfer the lease, and it would be unjust to burden the landlord with the associated costs.

Typically, the lease agreement includes a provision specifying this requirement, while the assignee is responsible for their own legal costs.

When is everything done?

All three documents (Deed of Assignment, Licence to Assign and Authorised Guarantee Agreement) are usually dated on the same date. This is the date upon which the legal title in the lease transfers over to the assignee.

Sometimes the Licence to Assign can be done in advance, but this is rare. If the lease assignment is completed as part of a business sale/purchase, the documents for the business side usually all carry the same date also.

The lease assignment process from start to finish typically takes four to twelve weeks or more, depending on many factors.

Wrapping up

Commercial lease assignments can be complex and require careful consideration of legal requirements and obligations. Seeking the guidance of a knowledgeable commercial property lawyer is crucial to ensuring a smooth and successful lease assignment process.

LawBite experienced lawyers are ready to provide the legal guidance and support you need for your commercial lease assignment.

Ashley Gurr is a commercial and contract lawyer at LawBite. Ashley has over 15 years of experience in private practice helping SMEs and in-house for an international consultancy group advising on commercial contracts and a multi-national utility giant in a contract strategy role.