Assigning and subletting a lease

If you're agreeing a lease on a commercial property in London that involves you subletting or taking an assignment of an existing lease, you need to understand your rights as a tenant.

First, you should get up to speed with the key terms.

• Subletting is where you rent the property from an existing tenant of the freeholder who owns the building. If letting from an existing tenant, you need to be sure that the tenant is allowed to sublet to you.

• When you take an assignment of a lease, you buy the lease off an existing tenant, and their landlord becomes your landlord. If taking an assignment, you need to be sure that they're allowed to sell their lease to you.

Likewise, you may be in a position where you want to sublet or assign your own lease to a third party (for example, if you have surplus space that you could rent out).

If this is likely, make sure there are provisions for this in your contract before you sign on the dotted line. As a small business, your capacity to sublet is likely to be more restricted than for a large business with lots of office space.

Provisions about subletting or assignment are called "alienation" clauses, and they dictate whether or not, and the extent to which, these activities are allowed. For example, an alienation clause may state that you, as a tenant, may rent out part of your property but not all of it.

The reason for these provisions is to assure the landlord that you won't sublet or assign a lease to an unreliable tenant that could end up harming their interest.

Here's what you need to know if you do want to let or take assignment of a lease from an existing tenant, or if you want to sublet or assign a lease to a third party.

Assigning and subletting: the facts

Most commercial leases allow subletting or assignment with the landlord's consent, and it's very rare for them to be completely prohibited. In fact, by law, your landlord has a duty not to withhold consent unreasonably.

If the lease doesn't explicitly forbid subletting or assignment, you're allowed to do both without any permission. If it does explicitly forbid them, you're not allowed to do either, unless you negotiate a price with your landlord to be able to do so.

The lease should specify any requirements that the tenant needs to meet in order to assign a lease or sublet. These requirements (or "covenants") could be that:

• The tenant must provide references or other information about the new tenant or subtenant.

• The new tenant or subtenant must agree in writing with the landlord that they will abide by the terms of the lease.

• The tenant must pay the landlord's reasonable legal and surveyance costs involved in the assignment or subletting.

What if a landlord withholds consent?

If the landlord does withhold consent, their reasons for doing so should be detailed in the alienation section of the lease agreement.

If you think that their refusal is unreasonable, the tenant can apply to a court to force them to give consent and award damages.

The court will decide what is reasonable based on whether the tenant and the subtenant have kept to the requirements. For example, if the tenant doesn't agree to pay legal and surveyance costs, the court will rule in the landlord's favour.

How does assignment work?

In most cases, a landlord will need to give consent to any sale or transfer of the lease through a "licence to assign" document. Once agreed, the landlord is in a relationship with the new tenant and will collect rent directly from them.

For commercial lease assignments, landlords will typically insist that the tenant enters into an authorised guarantee agreement (AGA). In this case, if the tenant fails to pay rent or meet their obligations, the previous tenant becomes responsible for doing both.

How does subletting work?

In subletting, the original tenant retains responsibilities for the conditions set out in the lease agreement, even if a third party is now paying the rent.

What happens if the tenant breaches the clauses on assignment and subletting?

In this situation, the landlord is within their rights to terminate the lease, known in law as "forfeiture". When a lease is forfeited, the tenant is forced to leave the property without compensation and may have to pay legal costs and damages.

If you're taking an assignment, make sure you're not taking on a lease that's in breach of these clauses. Even if it was the previous tenant's fault, you could be evicted with no compensation.

Your cultural and community space toolkit

If you're reading this guide as part of the toolkit for opening, running and growing a cultural or community space, next look at step 7: overview of common terms covered by a lease agreement.

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