Most commercial leases contain provisions dealing with the tenant’s ability to assign, sublet, charge, part with possession or otherwise deal with the tenant’s interest in the property. Such terms are known as ‘alienation’ provisions.
The sale by a tenant of its leasehold estate is referred to as an assignment.
An assignment entails the tenant, as assignor, disposing of its leasehold interest, such that the remainder of the contractual term is vested in the buyer as assignee.
The tenant’s ability to assign the lease (and the landlord’s freedom to consent to, refuse or impose conditions in respect of such an assignment) will be governed by the provisions of the lease.
Landlords will be keen to control the identity of the tenant during the term of the lease, and will typically impose conditions on the tenant’s ability to assign. A balance will need to be struck during negotiations between the landlord’s requirements and the tenant’s wish to freely dispose of its interest during the contractual term.
Generally, the landlord’s consent to an assignment will be required, though the law imposes certain duties on the landlord with regard to the provision of such consent.
Underletting (or sub-letting)
Where the tenant wishes to retain its interest in the lease, but permit another to use the demised property, the tenant may wish to sub-let the premises.
Commercial leases typically impose restrictions on the tenant’s ability to underlet, and stipulate terms that must be included within any underlease. The landlord will be keen to control the identity of any undertenant to ensure, for example, that the undertenant is of sufficient financial standing.
As with assignments, certain statutory duties are imposed on the landlord with regard to the provision of consent to underlettings.
Underlettings of part only are often prohibited entirely, owing to the ensuing estate management problems that may arise.
A commercial tenant may require the right to grant a charge over its leasehold interest as security when raising finance.
The tenant’s freedom to do so should be weighed against the complications for the landlord that may arise if a lender sought to exercise its remedies in relation to the charge on a default by the tenant.
Parting with or sharing occupation
Tenants may be afforded the right to share occupation of the premises with a group company. Beyond this, it is common for leases to absolutely prohibit the tenant from parting with or sharing occupation.
Alienation provisions should be considered carefully, and professional advice sought at an early stage. For further information, please contact our commercial property team: