Lease Assignment & Subletting

During the life of your business, there are a number of reasons why you might need to consider an assignment or underletting. As a tenant, you might be looking to assign your lease to a third-party, or even let out your existing property to another business or individual. Perhaps you are selling your business and need to think about how the legal ownership of your lease will pass to the buyer. Alternatively, you might find that one of the properties in your portfolio is surplus to requirements, but rather than surrender the lease, you would prefer to let it out.

In both cases, there will be strict requirements that control the way in which an assignment or subletting is achieved. As a landlord, you might be approached by your tenant, seeking permission for either of the above scenarios. In both matters, is it absolutely essential that all parties clearly understand the contractual and legal obligations and how they are to be achieved, in order to avoid a breach of the terms of the lease.

Lease Assignment & Subletting

As a tenant, you might be looking to assign your lease to a third-party, or even let out your existing property to another business or individual. Perhaps you are selling your business and need to think about how the legal ownership of your lease will pass to the buyer. Alternatively, you might find that one of the properties in your portfolio is surplus to requirements, but rather than surrender the lease, you would prefer to let it out.

In both cases, there will be strict requirements that control the way in which an assignment or subletting is achieved. As a landlord, you might be approached by your tenant, seeking permission for either of the above scenarios. In both matters, is it absolutely essential that all parties clearly understand the contractual and legal obligations and how they are to be achieved, in order to avoid a breach of the terms of the lease.

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Lease Assignment & Subletting FAQs

Before a lease can be assigned, it is important that all parties involved understand the requirements of the landlord and the legal mechanism under the lease to properly achieve the assignment.

The landlord might be entitled to insist on certain conditions – for example, they might wish to see bank and trade references for the incoming tenant, to ensure that they are of a sufficient financial standing to afford to take on the lease.  This is often a contractual right of the landlord to insist upon.  Likewise, a landlord might be able to insist that a third-party (a company director or family friend/parent) stands as a guarantor for the incoming tenant, should that tenant fall behind on rent or breach the lease.

The outgoing tenant might be legally obliged to sign what is known as an authorised guarantee agreement – or AGA.  This is a separate, legally enforceable agreement between the outgoing tenant and the landlord that makes the outgoing tenant legally responsible (as a guarantor) for payment of rent and other performance of duties, if the incoming tenant fails to do so.

There are a variety of documents involved in an assignment of a lease, but one can usually expect to see:

  • a licence to assign – the landlord’s contractual permission for the lease to be assigned;
  • an authorised guarantee agreement – where the landlord expects the outgoing tenant to guarantee the performance of the incoming tenant;
  • a rent deposit deed (optional) – this document will be required where the landlord requires the incoming tenant to lodge a deposit and shall be the legal agreement to govern how the deposit is administered and managed; and
  • a deed of assignment or transfer deed – depending on whether or not the lease is registered at HM Land Registry, one of these two documents will be required to transfer legal ownership of the lease from the outgoing tenant to the incoming tenant.
The legal fee involved with an assignment of lease will largely depend on both the complexity of the transaction and the requirements involved.

If you are an outgoing tenant, you should expect that the landlord will instruct their own solicitors and expect the professional fees of those solicitors to be paid for by you. This will often be a contractual entitlement of the lease. Once you have decided that you are committed to an assignment of your lease, you should contact the landlord as soon as possible to establish who the landlord intends to instruct and what – if anything – they will expect you to pay. It may be possible to negotiate an agreement with the incoming tenant that the costs of the landlord will be shared in proportions to be agreed between the parties. However, you should be aware that the landlord will expect you to cover the whole of the costs in the first instance.

If you are a landlord, the position is largely as explained above. The lease will often contain terms and conditions that allow you to recover the reasonable legal fees of your chosen lawyers in representing you, that are often payable by and recoverable in full from the outgoing tenant in the first instance.

Whether you are a landlord or a tenant, it is the best advice of the firm to contact us as soon as possible upon deciding that your transaction involves a lease assignment, so that we can advise you as to likely third-party costs and prepare and provide you with a quote for our own professional legal fees.

Subletting is an alternative to assignment for a tenant. Rather than parting with the legal ownership of their lease, the tenant can look to grant a lease of their own and become a “middle” landlord to their own tenant – known as a subtenant or undertenant.

Subletting is governed, in a similar way as assignments, by a range of requirements that the landlord is permitted to insist upon. Unlike an assignment, which will require a deed of assignment or transfer deed, the grant of a sublease will require the drafting of a new lease between the current tenant and the new undertenant.

The original lease to the tenant will contain a number of details that must be included in the sublease, such as ensuring that the sublease ends before the original lease out of which it is granted and that a direct legal promise between the undertenant and the landlord is included. Subletting is often considered by a tenant wishes to vacate a property, but where an assignment is not achievable or has been legitimately refused by a landlord.