Whether you are a Tenant or a Landlord of a Commercial Property, you’ll want to know what you can and cannot do in relation to assigning and sub-letting a Lease. Our Commercial Property Specialists give a short guide on the difference between absolute and qualified restrictions, but as always if there is anything which you need specific advice on then please speak to one of the team.
In today’s business world, it is often advantageous for a tenant to take a lease that can be assigned or sub-let for flexibility for the Tenant. Even a young start up company might quickly outgrow the premises, and larger companies may change their business plans. However it is common in commercial leases for the landlord to impose restrictions on dealings. Sometimes these restrictions can be ‘absolute covenants’ or ‘qualified covenants’ and care should be taken before entering into a lease to ensure you’re getting what you ideally need from it.
Absolute covenant
This is where a Tenant would not be able to deal with the property without being in breach of the lease. An example clause in a Lease may say: “the tenant] not to assign or sublet whole or part of the property’. This would mean the tenant would be unable to assign or underlet whole or part of the property unless the Landlord decided to waive this prohibition, that waiver would need to be in writing but would seem unlikely given the Lease expressly deals with the matter. With absolute covenants, the Landlord can refuse any request to waive the covenant, without having to provide justification or reason for such refusal (subject to restrictions imposed by the Equality Act 2010).
These absolute covenants are rare in commercial leases (except whereby it prohibits dealings with part rather than whole of the property and in the cases of very short -term leases) however, a Tenant should try to resist these covenants or otherwise at least ensure the rent adequately reflects such a restriction of dealings.
Generally speaking, a commercial Lease will have a mixture of absolute and qualified covenants.
Qualified covenants
A qualified covenant in a commercial lease is where alienation is prohibited but can be done with the landlord’s consent. For example, as above but with the added proviso: ‘[the tenant] not to assign or sublet whole or part of the property without the consent of the Landlord’. However, it means that a Lease can be assigned or sub-let with the Landlord’s consent.
It is common to see the added wording ‘such consent not to be unreasonably withheld or delayed’ (deemed a fully qualified covenant) however, by virtue of section 19(1)(a) of the Landlord and Tenant Act 1927 (“the Act”) even if this added wording is not expressly stated, it will be implied to the covenant. This was intended to stop the Landlord blocking the Tenant’s transaction without reasonable cause.
If a Landlord withholds consent and the tenant thinks that decision is unreasonable, it can apply to the Leasehold Valuation Tribunal for review. However, by virtue of section 19(A) of the Act the Lease can set out terms in which the Landlord can refuse his consent. The Landlord can stipulate conditions that need to be satisfied, and if he withholds his consent on the grounds that those conditions have not been satisfied, then that consent will not have been unreasonably withheld. These will typically be payment of rent, compliance with the Lease, but also on the basis that the Tenant enters into an Authorised Guarantee Agreement (AGA) to guarantee the incoming tenant’s responsibilities.
A Tenant must therefore consider the impact of each condition before agreeing to their insertion into the lease. It could restrict their actual ability to deal with the Lease and in turn they might find themselves unable to assign or underlet due to the conditions for consent being too restrictive.
Sub-letting or Assigning Commercial Leases
Once you have discovered whether you have the ability as a Tenant to assign or sub-let, then the commercial property lawyers acting for the Landlord and those acting the Tenant can start the legal process. This will usually involve a Deed of Assignment or a Sublease being prepared by the Landlord’s Solicitors (and usually the Tenant will have to pay their fees). This will need to be negotiated and drafted to protect you as a Tenant. As above, it is likely that the Tenant will also need to enter into an Authorised Guarantee Agreement to guarantee the incoming Tenant’s performance of the Lease.
If you require any advice as to how a lease could affect you with regard to the above or any other point, feel free to contact any one of the commercial property solicitors in Leicester at Josiah Hincks on 01162551811.
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