When a tenant no longer wishes to continue with the lease of commercial real estate, a licence to assign allows them to transfer their interest to a new tenant.
The original lease will usually contain the requirements for securing a licence from the landlord, which is effectively the landlord’s agreement to a new lease.
Why is a licence to assign necessary?
Most commercial leases prohibit the transfer of a tenancy to a new party without the landlord’s express consent. Tenants often have lease terms that last many years, and if they want to leave the premises, they will still be required to pay rent until they reach the end of the lease term or are able to end the tenancy by enforcing a break clause.
A licence to assign is the landlord’s formal agreement to a tenant transferring their interest to a new party. The landlord has the opportunity to vet and approve or decline the new party and will also decide what conditions to impose to safeguard their investment.
The landlord will generally require the outgoing tenant to provide guarantees in respect of a range of issues, such as payment of the rent.
What is the process for obtaining a licence to assign?
The lease will set out some guidelines on obtaining a licence to assign, including whether an authorised guarantee agreement is required.
Consent is formally requested from the landlord, and due diligence information relating to the proposed new tenant should be provided. This will usually include financial documentation such as accounts and bank statements.
The outgoing tenant will generally be required to meet the landlord’s reasonable legal and professional costs, and the landlord is likely to want a written undertaking in respect of this at the outset.
If the landlord consents to the proposed tenant, the landlord’s solicitor will draft a licence to assign for approval by both the tenant and the proposed new tenant.
What is included in an authorised guarantee agreement?
Landlords will seek to protect their interests by requiring the outgoing tenant to sign an authorised guarantee agreement. Clauses commonly included are:
- A guarantee that the outgoing tenant will meet all the covenants in the lease if the new tenant fails to do so. This relates to issues such as repairs, maintenance, and payment of the rent
- The outgoing tenant will be liable for any breaches of the lease by the new tenant, meaning that the landlord can take legal action against the outgoing tenant where necessary
- Should the new tenant become insolvent, the outgoing tenant can be required to take the lease back for the rest of the term
- If the outgoing tenant had a guarantor, the guarantor may also be required to sign the authorised guarantee agreement
- The outgoing tenant’s obligations under the licence to assign will usually last until the end of the lease term or until the lease is assigned to a new party, although occasionally there may be scope to negotiate an earlier release for the outgoing tenant, depending on the strength of their position. Where a tenant has security of tenure, the obligations under the authorised guarantee agreement can continue beyond the end of the original lease term
An authorised guarantee agreement cannot impose more liability on the outgoing tenant than was included in the lease. If it does, the agreement is void and unenforceable.
Because an outgoing tenant usually retains liability under the lease, it is essential to carry out careful due diligence when approving a new tenant.
How 3CS can help
Our experienced commercial real estate solicitors offer expert advice and representation in respect of all aspects of assigning commercial leases.
For advice or guidance, please get in touch.
