6. Assigning a Lease and Rent Review

Question 1

What does a commercial lease typically allow in terms of assignment?

Answer 1

The commercial lease usually allows the assignment of the entire property.

Question 2

Is it possible to assign only a part of the property in a commercial lease?

Answer 2

No, the assignment is typically for the entire property. This restriction is in place because many properties are unsuitable for legal and physical sub-division into separate ownership.

Question 3

What are thee three statutory provisions that are relevant to assignment covenants?

Answer 3

1. Section 19(1)(a) Landlord and Tenant Act 1927
2. Section 19(1A) Landlord and Tenant Act 1927
3. Section 1 Landlord and Tenant Act 1988

Question 4

What is the significance of Section 19(1)(a) of the Landlord and Tenant Act 1927 in commercial leases?

Answer 4

Implies into any qualified covenant (such as not to assign without the landlord’s consent) that the consent is not to be unreasonably withheld.

Question 5

What is the effect of Section 19(1)(a) of the Landlord and Tenant Act 1927 in commercial leases?

Answer 5

This transforms a qualified covenant into a fully qualified covenant, ensuring that the landlord’s consent cannot be unreasonably withheld.

Question 6

What does Section 19(1A) of the Landlord and Tenant Act 1927 enable in commercial leases regarding the landlord’s consent to assignment?

Answer 6

Section 19(1A) allows the landlord and tenant to pre-agree on conditions and circumstances in which it would not be unreasonable for the landlord to refuse consent for assignment.

Question 7

What are examples of pre-agreed conditions under Section 19(1A), and how do they impact the reasonableness of the landlord’s consent?

Answer 7

Examples of pre-agreed conditions include the assignor providing an authorized guarantee agreement (AGA) for the assignee or the assignee agreeing to provide guarantors.

Effect: when these conditions are met, they are deemed reasonable, offering flexibility in the consent process.

Question 8

What does Section 1 of the Landlord and Tenant Act 1988 stipulate regarding the landlord’s response to a tenant’s application for consent to assignment in a commercial lease?

Answer 8

Mandates that when a tenant makes a written application for consent to assignment and there is a qualified covenant in place, the landlord must, within a reasonable time:

a) Give consent, unless there are reasonable grounds to withhold it.

b) Serve on the tenant a written notice of its decision, specifying:

i) Conditions if consent is granted.

ii) Reasons for withholding consent if applicable.

Question 9

According to the Court of Appeal in 1986, what is the purpose of a fully qualified covenant against assignment in a commercial lease under Section 19(1)(a)?

Answer 9

The purpose is to protect the landlord from undesirable use or occupation of the premises by an undesirable tenant or assignee

Question 10

What grounds are landlords not entitled to use when refusing consent to an assignment, based on the Court of Appeal’s guidelines?

Section 19(1)(a)

Answer 10

Landlords are not entitled to refuse consent on grounds that have nothing to do with the relationship of landlord and tenant regarding the subject matter of the lease.

Question 11

What burden of proof does the landlord have in demonstrating the reasonableness of refusing consent, as per the Court of Appeal’s guidelines?

Section 19(1)(a)

Answer 11

The landlord is not required to prove the justifiability of its conclusions if they could be reached by a reasonable person in the circumstances.

Question 12

According to the Court of Appeal’s guidelines, is it reasonable for a landlord to refuse consent based on the intended use of the premises by the proposed assignee, even if not forbidden by the lease?

Section 19(1)(a)

Answer 12

Yes, it may be reasonable for a landlord to refuse consent based on the proposed assignee’s intended use of the premises, even if not forbidden by the lease.

Question 13

What factors should a landlord generally consider when deciding whether to refuse consent to an assignment, and are there any exceptions?

Section 19(1)(a)

Answer 13

A landlord should generally consider only its own relevant interests. However, it would be unreasonable not to consider extreme and disproportionate detriment to the tenant if consent is refused.

Question 14

How does the Court of Appeal characterize the reasonableness of refusing consent in each case, according to the guidelines?

Section 19(1)(a)

Answer 14

The reasonableness of refusing consent is a question of fact, depending on all the circumstances in each case.

Question 15

What are examples of situations where consent has been held to have been reasonably withheld?

Answer 15

• Unsatisfactory references for the proposed assignee.
• Long-standing and extensive breach of the repairing covenant by the assignor, with uncertainty about the assignee’s ability to remedy the breach.
• The assignee being in a position to compete with the landlord’s business.
• The assignment reducing the value of the landlord’s reversion, though not reasonable if the landlord has no intention of selling the reversion.
• The proposed assignee intending to carry on a use detrimental to the premises or inconsistent with the landlord’s ‘tenant mix’ policy.
• The assignee gaining protection under Part II of the Landlord and Tenant Act 1954, unlike the assignor.

Question 16

What are examples of situations where consent has been held to have been unreasonably withheld?

Answer 16

• The landlord refusing consent in an attempt to gain some advantage for itself.
• Instances where there are only minor breaches of the repairing covenant.
• Premises being on the market for 18 months, where the rent is significant, and the slight harm to the landlord is outweighed by prejudice to the tenant.

Question 17

Is it generally considered reasonable for a landlord to withhold consent if the assignee plans to use the premises in violation of the lease terms?

Answer 17

Yes, it is generally considered reasonable for a landlord to withhold consent when an assignee proposes to use the premises in breach of the lease terms.

Question 18

Are there circumstances where refusing consent solely based on the anticipation of a breach of the user covenant might be deemed unreasonable?

Answer 18

Yes, there could be circumstances where the refusal of consent based solely on the anticipation of a breach of the user covenant would be unreasonable. Each case is evaluated on its own merits, considering what a reasonable landlord would do in the given circumstances.

Question 19

What financial obligation does the lease typically establish for the tenant?

Rent Review

Answer 19

The lease typically reserves an annual rent, and the tenant is obligated to pay this rent, as specified in the tenant’s covenant within the lease.

Question 20

What matters are required to be made clear in the lease with regards to rent?

Answer 20

• When rent is payable
• Whether rent is payable in advance or arrears
• How instalments are to be apportioned
• How the rent is to be paid
• VAT
• Review of the rent

Question 21

What is the effect of a lease being silent on whether rent is payabled in advance or arrears?

Answer 21

rent is deemed to be paid in arrears - but more usual to be in advance.

Question 22

What is a rent review clause?

Answer 22

A mechanism by which the annual rent payable under a lease is periodically reassessed.

Question 23

What are the four types of a rent review clause?

Answer 23

1. Fixed increase
2. Index-linked
3. Tenant’s receipts
4. Open market rent review

Question 24

What is a fixed increase rent review clause and what are its benefits/difficulties?

Answer 24

Effect: provides that at various set dates throughout the term, the rent will increase to a set amount.

Benefits: certainty + simplicity

Difficulties: predicting with certainty what rental levels are likely to e at a given point in the future.

Question 25

What is an index-linked rent review clause?

Answer 25

• Index-linked rent are tied to external indices, like the Retail Prices Index, adjusting for inflation.
• However, they may not precisely reflect property market changes.
• ‘Cap and collar’ limits are often included to control percentage increases and ensure a minimum rise.

Question 26

What is a tenant’s receipts-based rent review in a commercial lease?

Answer 26

It links rent adjustments to the tenant’s receipts, often tied to turnover, profits, or subletting sums. This aligns with the tenant’s financial health and incentivizes the landlord to boost the tenant’s trade.

Question 27

What are potential advantages and disadvantages of a tenant’s receipts-based rent review for the landlord?

Answer 27

Advantages include tracking the tenant’s financial health and creating an incentive for the landlord to enhance the tenant’s trade. However, there are evident drawbacks for the landlord if the tenant’s business falters.

Question 28

What is an open market rent review?

Answer 28

It involves adjusting rent at regular intervals (usually every 3–5 years) based on the current open market rental value of the premises.

Question 29

What is the most common form of rent review clause?

Answer 29

Open market rent review

Question 30

What is the aim of an open market rent review clause?

Answer 30

To determine the rent which a tenant would be prepared to pay were the property to be let in the open market on the terms of the lease on the rent review date.

Question 31

Is an open market rent review literal or hypothetical and what should it be based on?

Answer 31

it’s a hypothetical assessment and should be based as closely as possible on the reality of the situation.

Question 32

What are the two elements to consider for an open rent review?

Answer 32

1. the physical property
2. the terms of the lease itself

Question 33

What is the solution to valuation problems in an open market rent review?

Answer 33

A rent review clause will make certain assumptions and disregards to try to balance out any issues.

Question 34

Common assumptions are that the property is available to let in the open market:

certain clauses open market rent review

Answer 34

• by a willing landlord to a willing tenant
• with vacant possession
• on the terms of this lease other than as to the amount of the annual
• for a term of X years
• on the assumption that the tenant has fully complied with their obligations in this lease
• on the assumption that if the property has been destroyed or damaged, it has been fuly restored.

Question 35

Common disregards:

certain clauses open market rent review

Answer 35

• any effect on rent of the fact that the tenant has been in occupation of the property
• any goodwill attached to the property by reason of any business carried out there by the tenant
• any effect on rent attributable to any physical improvement to the property carried out by the tenant with all necessary consents and not pursuant to an obligation to the landlord

Question 36

What is the role of the hypothetical lease, assumptions, and disregards in the open market rent review process?

Answer 36

serve as a set of instructions guiding the parties in determining the level of rent during the review process.

Question 37

What four key aspects related to rent reviews does the lease need to address?

Answer 37

1. Level of Rent:
* Rent review clauses may be upwards-only, keeping the rent the same or increasing it.
* Upwards-downwards reviews, preferred by tenants, reflect market reality.
* Institutional landlords often insist on upwards-only reviews for a predictable yield.
* The lease may stipulate that the annual rent post-review is the greater of the existing rent and the open market rent.

2. Frequency of Review:
* Typically set every three or five years, aligning with the lease commencement anniversary.

3. Instigating the Review:
* Parties negotiate through specialist valuers, reaching an agreement.
* Time is not of the essence, and the tenant continues paying the existing rent with interest on any delayed increase.

4. Independent Determination:
* If parties fail to agree, the lease should allow for referral to an independent third party, often appointed through the Royal Institute of Chartered Surveyors.

Question 38

What is an assignment?

Answer 38

the transfer of an existing lease by the tenant (the ‘seller’ or ‘assignor’) to a third party (the ‘buyer’ or ‘assignee’).

Question 39

What are the significant differences between the sale of a freehold property and the assignment of a lease?

Answer 39

1. Existence of Lease:
* The lease is a crucial factor in lease assignment, distinguishing it from freehold property sales.
* Unlike the grant of a lease, there’s no room for negotiation on lease terms during assignment.
* The assignee’s solicitor ensures the lease aligns with the assignee’s needs.

2. Variation of Lease Terms:
* Although lease terms are typically non-negotiable, the landlord may, at their discretion, agree to vary certain terms.

3. Landlord’s Consent:
* Unlike freehold property sales, landlord’s consent is usually necessary for lease assignments in commercial properties.
* This consent requirement is a major distinction.

4. Assignment Consideration:
* Leases with market rent typically lack capital value, resulting in no purchase price (premium) during assignment.
* If a premium is required, it is generally a relatively small sum.

Question 40

What is a common requirement in leases of commercial property regarding assignments, particularly concerning landlord’s consent?

Answer 40

Leases of commercial property typically stipulate that the landlord’s consent must be obtained before any assignment can take place.

Question 41

Whose responsibility is it to apply for the landlord’s consent in the process of a lease assignment?

Answer 41

It is the assignor’s responsibility to apply for the landlord’s consent.

Question 42

What is commonly involved in the process of obtaining landlord’s consent for a lease assignment, and how is this consent typically formalised?

Answer 42

• The assignor must use all reasonable endeavors to obtain consent.
• Both parties involved in the assignment usually need to be engaged in the process.
• The landlord’s consent is often formalised through a document known as a ‘licence to assign.’

Question 43

At what stage of the lease assignment process does the assignor need to confirm the landlord’s agreement to the assignment in principle, even though the formal licence to assign is not yet finalised?

Answer 43

The assignor needs to check at the pre-exchange stage that the landlord will agree to the assignment in principle, even before the formal license to assign is finalized at completion.

Question 44

In the context of a lease assignment, what is commonly expected regarding the payment of legal and other professional costs?

Answer 44

It is usual for the landlord’s solicitors to require an undertaking from the assignor’s solicitors for the payment of the legal and other professional costs.

Question 45

What conditions might a landlord impose for a lease assignment, and are premium payments typically allowed?

Answer 45

• A landlord may require the assignee to provide a guarantor and the assignor to enter into an authorized guarantee agreement.
• Premium payments by the assignor are generally not allowed unless explicitly permitted by the lease, which is uncommon.

Question 46

When must the landlord’s consent be granted in the context of a lease assignment, and what are the consequences if not obtained by completion?

Answer 46

The landlord’s consent must be given by or on completion of the assignment; otherwise, the assignor is likely to be in breach of the assignment covenant in the lease.

Question 47

How does the contract typically address obtaining the landlord’s consent in a lease assignment under the SCs?

Answer 47

• Either party can rescind the contract if consent is not given three working days before the completion date.
• Uncertainty arises when contracts are exchanged before obtaining landlord’s consent, and caution is advised, especially in transactions with timing dependencies.

Question 48

How does the contract typically address obtaining the landlord’s consent in a lease assignment under the SCPCs?

Answer 48

• If the landlord’s consent is not obtained by the completion date, completion is postponed until five working days after the assignor notifies the buyer.
• Rescinding the contract is allowed six months after the original completion date, giving flexibility, but caution is still recommended when exchanging contracts before obtaining consent.

Question 49

What is the purpose of a licence to assign?

Answer 49

For the landlord to give consent to the assignment of the lease by the assignor to the assignee.

Question 50

What potential consequences may arise if an assignment takes place without obtaining the landlord’s consent, and how does it relate to the tenant’s alienation covenants and lease forfeiture?

licence to assign

Answer 50

If the assignment occurs without obtaining consent:
* The assignor may breach the tenant’s alienation covenants in the lease.
* The assignor may not be released from liability under the tenant’s covenants.
* The lease itself could be liable to forfeiture.

Question 51

Who prepares the draft for a licence to assign and who is it sent to?

Answer 51

landlord’s solicitor prepares the draft and send dit to assignor’s solicitor to coordinate amendments/agreements.

Question 52

In the context of a licence to assign, what is the typical structure of covenants in the licence and how are parties involved, including the landlord, assignor, and assignee?

Answer 52

• The licence may include covenants, and if so, both the assignor and assignee will enter into them.
• All three parties (landlord, assignor, and assignee) become parties to the licence, usually in the form of a deed.
• The licence is often prepared in triplicate, ensuring each party receives a signed and dated part upon completion.
• Guarantors of the assignee or assignor may be required to join in the licence.

Question 53

What are the key provisions that a typical licence to assign will contain?

Answer 53

1. The landlord grants (time-limited) consent to the assignor to assign the lease to the assignee.
2. If the lease was granted on or after 1 January 1996, the assignor will typically give an
   authorised guarantee agreement to the landlord
3. If the lease was granted before 1 January 1996, a direct covenant by the assignee to the
   landlord to observe and perform the covenants in the lease for the remainder of the term
4. the assignor agrees to pay the landlord’s legal and professional costs.

Question 54

Are the terms of the lease negotiable when assigning a lease of commercial property?

Answer 54

No, the terms of the lease are not negotiable.

Question 55

What does the assignee’s solicitor need to do?

Answer 55

Report to the client and any lender on the terms of the lease.

Question 56

What does the assignor’s solicitor need to check in the lease?

Answer 56

Whether the landlord’s consent is required for an assignment of the lease.

Question 57

Is consent usually required for leases of commercial property?

Answer 57

Yes, consent is usually required for leases of commercial property.

Question 58

What are the detailed requirements or conditions that leases granted on or after 1 January 1996 are likely to contain?

Answer 58

Requirements for the assignor to provide the landlord with an AGA guaranteeing the performance of the tenant’s covenants by the assignee.

Question 59

What is likely to be required for leases granted before 1 January 1996?

Answer 59

A direct covenant from the assignee to perform the tenant’s covenants under the lease for the remainder of the term.

Question 60

When is it safest to exchange when the timing of completion is important?

Answer 60

After obtaining the landlord’s consent.

Question 61

What are the mechanisms provided in the standard conditions for obtaining consent between exchange and completion?

Answer 61

Mechanisms for obtaining consent and rescinding the contract if consent is not obtained by a certain date.

Question 62

When can either party rescind the contract if consent is not obtained in the SCs?

Answer 62

Three working days before the completion date.

Question 63

When can the parties rescind the contract if consent is not obtained in the SCPCs?

Answer 63

Six months after the completion date.

Question 64

What should the assignor’s solicitor modify in the transfer deed?

Answer 64

The implied covenants for title to avoid implying that the repair covenant in the lease has been performed.

Question 65

What should the transfer deed contain?

Answer 65

An indemnity from the assignee where the assignor remains liable for breach of the tenant’s covenants after the assignment.

Question 66

When should the apportionment of rent take place?

Answer 66

On the completion date.

Question 67

What is SDLT/LTT payable on?

Answer 67

The purchase price, not the rent reserved by the lease.

Question 68

What must be done with the assignment of a registered lease?

Answer 68

It must be registered at the Land Registry.

Question 69

What happens when an unregistered lease with over seven years unexpired is assigned?

Answer 69

It triggers first registration.

Question 70

Who must be given notice of the assignment?

Answer 70

The landlord.

Question 71

How long does the AGA last for?

Answer 71

As long as the tenant is there (as the assignee)

Question 72

What does the length of an assignment have to be?

Answer 72

The term of the head lease.

Question 73

What is the effect of S.1 LTA 1988 on a fully qualified alienation?

Answer 73

cannot reasonably withhold decision provided the tenant has made the request in writing

Question 74

Is there a time limit for a landlord to respond to giving consent?

Answer 74

It has to be within a reasonable time - usually 28 days.

Question 75

What is the effect of S.19(1)(a) on a qualified alienation?

Answer 75

Upgrades it to a fully qualified

Question 76

What does S.19(1A) apply to?

Answer 76

assignment only - landlord can draft circumstances and conditions.

Question 77

What are examples of a Landlords reasonably withholding consent?

Answer 77

• Landlord and tenant relationship
• in relation to a business
• breach

Question 78

Why is consent in a licence to assign time-limited (eg three months)?

Answer 78

because the landlord has no control over when the assignment takes place and the assignee’s financial position can change in a short time.

Question 79

After consent is given when is completion under SCPC?

Answer 79

Once consent is given the new date of completion is 5 working days after consent.

Question 80

What happens if the parties cannot agree rent reviewed?

Answer 80

Tenant will continue to pay the old rent in the interim BUT refer to an independent third party.

Question 81

What happens after rent is agreed when the parties initially disagreed and tenant was paying old rent in interim?

Answer 81

Once the rent is agreed it becomes payable on the date when the next rent payment falls due BUT tenant must account for shortfalls and pay interest.