Chapter 9: Alienation

Question 1

Assignment
1.1 What is an assignment?

Answer 1

The grant of a lease creates a leasehold interest. Just as a freehold interest may be sold or transferred to a new owner, so a leasehold interest may be sold or transferred.

Question 2

1.1 What is an assignment?

Answer 2

We speak of the lease being assigned by the existing tenant (assignor) to the new tenant (assignee). As with a freehold, the assignee may pay for the leasehold interest, or the consideration may simply be the assignee agreeing to pay the rent and perform the other obligations of a tenant under the lease. Assignment is a form of alienation.

Question 3

Alienation

Answer 3

This simply means a disposal of all or part of the tenant’s interest in the lease. Assignment is one form of alienation, but we will look at others.

Question 4

Following assignment, the landlord becomes the landlord of the assignee.

Answer 4

The new tenant is now entitled to exclusive possession of the premises and is obliged to pay the
rent and perform the other tenant covenants.
The assignor is no longer entitled to use the premises, and generally need not pay the rent or
perform the other tenant covenants. However, the assignor may still have liability for them, as we
will see.

Question 5

1.2 Why an assignment?

Answer 5

A tenant may want to assign the premises if they no longer need them for the purposes of their
business or cannot afford to keep paying the rent (perhaps following a rent review). If the premises are right for the assignee, conversely, they may be only too happy to take the lease.

Question 6

Assessment focus point

Answer 6

If the lease is silent, then the tenant is free to assign. In practice, a commercial lease will likely require that, before assignment, the tenant apply to the landlord for consent. The landlord will want to be able to vet potential assignees.

Question 7

1.2 Why an assignment?

Answer 7

A tenant’s covenant against assignment may be drafted as absolute, qualified or fully qualified.
An absolute covenant means that assignment is not allowed. A commercial lease will usually contain an absolute covenant against assignment of part of the premises. The landlord will not want a letting split into parts, which creates various problems (that are beyond the scope of this course)

Question 8

1.3 Qualified covenants against assignment

Answer 8

A tenant’s covenant against assignment of whole may be qualified, meaning that assignment is only allowed with the landlord’s consent. However, s 19(1)(a) of the Landlord and Tenant Act 1927 converts a qualified covenant into a fully qualified covenant, meaning that the landlord must act reasonably if deciding to withhold consent. This restricts the landlord’s discretion

Question 9

1.3 Qualified covenants against assignment

Answer 9

Furthermore, s 1 of the Landlord and Tenant Act 1988 goes a step further, and states that the
landlord must give its decision on consent within a reasonable time. Again, note that statute affects different provisions differently. Alienation is the area where the law comes down most heavily in favour of the tenant. This is because it is unfair to bind a tenant
to the lease and premises where there is a willing and suitable prospective tenant to take over

Question 10

1.3 Qualified covenants against assignment

Answer 10

Case law suggests that a ‘reasonable time’ is dependent upon circumstances but should be
measured in days or weeks instead of months.

Question 11

1.4 When is it reasonable to withhold consent?

Answer 11

There is a large body of case law on when it is reasonable for the landlord to withhold consent.
The details of this are beyond the scope of this course, but here are some examples

Question 12

Example: Must relate to landlord/tenant relationship

Answer 12

The landlord cannot withhold consent on grounds not related to the landlord/tenant relationship,
such as a personal dislike of the prospective tenant or their business. Nor can they discriminate on
grounds of race, sex or disability.

Question 13

Example: Tenant-mix policy

Answer 13

The would-be assignee’s proposed use of the premises may be reasonable grounds to withhold
consent. For example, in a shopping centre, the landlord may have a policy on mixing different types of shops. If the prospective assignee’s proposed use does not fit this, then it may be reasonable to
withhold consent.

Question 14

Example: Inability to pay the rent

Answer 14

It is likely reasonable to withhold consent if the landlord has justifiable concerns about the
assignee’s ability to pay the rent; for example, if the tenant cannot produce satisfactory references. Another example would be if the assignee is newly incorporated and cannot produce accounts.

Question 15

Example: Inability to pay the rent

Answer 15

If the landlord does not act reasonably in withholding or delaying consent, then the tenant may
be able to claim damages (including costs for agents and solicitors). The landlord will, however, have various concerns regarding assignment. A commercial lease, therefore, will contain:
* circumstances that the parties agree will be reasonable grounds for withholding consent and
* conditions that may be imposed on assignment.

Question 16

Both conditions and circumstances

Answer 16

Both conditions and circumstances are recognised by s19(1A) Landlord and Tenant Act 1927. If valid, they provide the landlord with specific grounds on which consent may be reasonably withheld.

Question 17

Effect of a circumstance or condition

Answer 17

A lease’s assignment covenant includes a circumstance that all yearly rent is paid up to date, and a condition that the assignee provides a guarantor of the rent and other obligations. The landlord may reasonably withhold consent to the assignment if the tenant is behind with rent or if the
assignee refuses to provide a guarantor

Question 18

1.5 The assignor’s and assignee’s liabilities after assignment
Privity of contract

Answer 18

Privity of contract: At common law, privity of contract is the ability of the original parties to a
contract to enforce the obligations against each other, even after the contract has been
assigned

Question 19

Privity of Estate

Answer 19

Privity of estate: By contrast, privity of estate is the ability of the landlord and tenant for the time to enforce the provisions of a lease against each other. However, not all obligations are enforceable under privity of estate.

Question 20

1.5.1 Old leases

Answer 20

The common law position for old leases was that, despite assignment, the original tenant
remained liable to the landlord to pay the rent and perform the other obligations under privity of
contract.

Question 21

1.5.1 Old leases

Answer 21

By contrast, there were only limited obligations that automatically passed to the new tenant
under privity of estate, and the new tenant would have to covenant directly with the landlord to
observe all the tenant’s covenants in the lease.

Question 22

1.5.2 New leases

Answer 22

The Landlord and Tenant (Covenants) Act 1995 changed the liability of the assignor and assignee
to reflect better the commercial reality of the situation. The Act applies to leases granted on or
after 1 January 1996, which are referred to as new leases. When a new lease is assigned, the original tenant is released from liability, and all of the tenant
covenants are passed to the new tenant

Question 23

1.5.3 Authorised guarantee agreement

Answer 23

Landlords of old leases were used to being able to rely on privity of contract to treat the original
tenant as an effective guarantor. This stopped with new leases. However, the statute provides a mechanism whereby the original tenant can agree to guarantee the obligations of the incoming tenant. This is done by a document called an authorised
guarantee agreement (often abbreviated to AGA)

Question 24

1.5.3 Authorised guarantee agreement

Answer 24

Many commercial leases will make it a condition of assignment that the outgoing tenant enters
into an authorised guarantee agreement. If the lease is silent, then the landlord can only insist on
an AGA if it is reasonable to do so (eg if the assignee’s ability to pay the rent is in doubt). Whereas an original tenant’s liability under an old lease extended for the whole of the lease term, an outgoing tenant only guarantees the next tenant under an AGA. If there is a subsequent assignment, then the outgoing tenant’s liability under the AGA ends.

Question 25

Example: An AGA in practice

Answer 25

A Ltd, the tenant of a new lease, assigns the lease to B Ltd, and A Ltd gives X Ltd, the landlord, an authorised guarantee agreement. If B Ltd falls behind with the rent, X Ltd can pursue B Ltd as tenant but can also rely on the authorised guarantee agreement, and pursue A Ltd even though A Ltd is no longer in occupation.

Question 26

Example: An AGA in practice

Answer 26

B Ltd subsequently assigns the lease to C Ltd, and B Ltd gives X Ltd an authorised guarantee agreement. If C Ltd falls behind with the rent, X Ltd can pursue C Ltd as tenant and B Ltd under B Ltd’s authorised guarantee agreement. However, X Ltd cannot pursue A Ltd, as A Ltd’s liability under its AGA has ended. This is illustrated below.

Question 27

1.6 Summary

Answer 27

* Assignment means the existing tenant passing the lease to a new tenant. * A commercial lease will generally restrict assignment of part with an absolute covenant, and assignment of whole with a qualified covenant. * A qualified covenant against assignment is automatically upgraded to a fully qualified covenant, and it is also implied that the decision whether to grant consent is made within a reasonable time.

Question 28

1.6 Summary

Answer 28

* Under an old lease (pre 1 January 1996), the original tenant remains liable following assignment, and the new tenant is only liable for certain matters (and will therefore have to covenant directly with the landlord) * Under a new lease (1 January 1996 onwards), the original tenant is released from liability following assignment, and the new tenant is liable for all matters under the lease.

Question 29

2 Assignment procedure 2.1 The assignment procedure

Answer 29

The procedure of assigning a lease is similar to a freehold transaction. Although it is not something we will look at in detail, the procedure of assignment of a long residential lease (say 999 years), is almost identical to a freehold transaction, although there are some minor considerations (eg although the landlord’s consent may not be required, it is usually an obligation to notify them of the assignment).

Question 30

2.1 The assignment procedure

Answer 30

Our main concern, however, will be the assignment of a commercial lease. Although it is broadly similar to the freehold transaction, there are important differences, and it is common to skip the stage of exchange of contracts (as with the grant of lease procedure) and instead combine the pre-exchange and pre-completion steps together.

Question 31

2.2.2 Consent application

Answer 31

The tenant’s solicitor will usually apply to the landlord for consent early on in the transaction, as the whole transaction hinges on this being successful. The landlord’s solicitor will ask the tenant’s solicitor to give an undertaking for costs. The tenant’s solicitor will want to ensure that they are in funds (ie, have money in client account from the client to cover the undertaking).

Question 32

2.2.2 Consent application

Answer 32

The undertaking will typically cover the landlord’s solicitor’s and surveyor’s costs in considering the application. It will be capped at a certain amount (say up to £850 plus VAT for each of the solicitor’s and surveyor’s costs).

Question 33

2.2.2 Consent application

Answer 33

Once the undertaking has been provided, the landlord’s solicitor will draft a licence to assign (this will be covered in a separate section). Although a short document, both the tenant’s solicitor and assignee’s solicitor may have amendments that they wish to make, so it may take time for all three parties (landlord, tenant and assignee) to agree its final form.

Question 34

Undertaking for costs:

Answer 34

This is a promise by a solicitor to pay costs. Breach of the undertaking may lead to disciplinary action by the Solicitors’ Regulation Authority, and as a solicitor is an officer of the court, their undertaking is also enforceable in the courts.

Question 35

2.2.3 Draft contract and lease

Answer 35

The tenant’s solicitor will draft a contract if it is intended to exchange (for example, if the parties are anxious to bind themselves to the assignment subject to the landlord’s consent).

Question 36

2.2.3 Draft contract and lease

Answer 36

The tenant’s solicitor deduces title by providing official copies for the leasehold title, or if it is not a registered interest (ie, a term of 7 years or less), then the landlord’s title. In either case, a copy of the lease will be provided to the assignee’s solicitor.

Question 37

2.2.3 Draft contract and lease

Answer 37

The assignee’s solicitor will review the draft contract and amend if they feel appropriate in the assignee’s interests. The landlord is not normally a party to this contract. An important difference between the grant of lease and assignment procedure is that whereas a new tenant will have the opportunity to negotiate the lease, an assignee generally takes the lease as it is.

Question 38

2.2.3 Draft contract and lease - Deed of variation

Answer 38

Only in rare instances (eg, if the landlord would prefer to have the assignee over the tenant) might the landlord agree to vary the lease (this would require a deed of variation)

Question 39

2.2.4 Investigation of title, searches and enquiries

Answer 39

The tenant’s solicitor will deduce their leasehold title, and the assignee’s solicitor should investigate it. If the lease is unregistered, this would include investigating the landlord’s title, but if the lease is registered, then the assignee’s solicitor can rely on the leasehold official copies. The assignee’s solicitor will raise CPSE1 enquiries (as does a buyer’s solicitor in a commercial freehold transaction) but will also raise CPSE4 enquiries which are specific to the assignment of a lease.

Question 40

2.2.4 Investigation of title, searches and enquiries

Answer 40

The assignee’s solicitor should raise the same searches as they would if they were buying the freehold. In general, the assignee’s solicitor should ideally exercise the same care over their investigations with a leasehold transaction. In practice, the assignee may agree with their solicitor that the cost of full investigations are not justified for a very short lease with limited repair and other obligations. In this case, the assignee’s solicitor should ensure that the assignee is advised of the risks.

Question 40

2.3 Exchange

Answer 40

On exchange of a contract for assignment : * the tenant’s solicitor and assignee’s solicitor exchange in similar manner as for a freehold contract (usually adopting Law Society B) * no deposit is usually payable for assignment of a rack rental lease (for an assignment of a long residential lease, a 10% deposit would be usual, just like for a freehold) * the contract may set a fixed completion date, or may specify that completion is conditional (eg on the landlord’s consent)

Question 41

2.5 Completion

Answer 41

On completion of the assignment * the assignee’s solicitor sends the tenant’s solicitor the completion monies * the landlord’s solicitor, tenant’s solicitor and assignee’s solicitor agree over the telephone to complete and date the licence to assign * the tenant’s solicitor and assignee’s solicitor agree over the telephone to complete and date the deed of assignment

Question 41

Example: Apportionment of rent

Answer 41

A tenant assigns a lease halfway through the current quarter, and has paid a full quarter’s rent in advance. The completion statement will require the assignee to pay half of that quarter’s rent to the tenant

Question 41

Example: Apportionment of rent

Answer 41

The landlord will prepare the licence to assign in triplicate, as each of the landlord, tenant and assignee will want a signed copy at its completion. The assignee will draft the deed of assignment. If it is a registered lease, this will be in form TR1, as for a registered freehold. If the tenant’s solicitor is happy with the draft, then they will arrange for the tenant to execute it. The landlord is not involved in this.

Question 41

2.5.1 Post-completion Assignee’s solicitor

Answer 41

-Arrange to submit SDLT or LTT return and pay appropriate SDLT or LTT if necessary -Register assignment if necessary -Send formal notice of assignment to landlord’s solicitor

Question 42

Underletting 3.1 What is underletting?

Answer 42

Underletting is another form of alienation. Unlike assignment, the tenant does not pass its leasehold interest on entirely, but instead grants an underlease to an undertenant. The underlease must be for a shorter term than the lease itself, even if only a day shorter.

Question 42

Example: Apportionment of rent

Answer 42

As with a freehold transaction, pre-completion searches are carried out if the lease is registered. The appropriate search is an OS1 search of the whole of the tenant’s leasehold title. Note that it does not matter here if it is a lease of part or whole, as it is not the landlord’s title being searched.

Question 43

Following underletting

Answer 43

Following an underletting, the tenant remains the tenant of the landlord, and must pay the rent and ensure that the other obligations are performed. The tenant, however, receives a rent from the undertenant which the tenant may use to pay the rent under its own lease.

Question 44

3.1 What is underletting?

Answer 44

The tenant can also enforce the undertenant’s covenants to ensure that the tenant does not fall foul of its own covenants to the landlord.

Question 45

3.2 Why an underletting?

Answer 45

A tenant may want to underlet the premises if: * they are not using all of the premises, and it is possible to underlet the part they are not using * they do not need the premises at the moment, but are likely to do so in future * they cannot find a willing assignee, but can find a willing undertenant

Question 46

Assessment focus point

Answer 46

If the lease is silent, then the tenant is free to underlet. However, a commercial lease will impose a requirement of consent, and will want to vet prospective undertenants. Underlettings of part, may be permitted if it is practical to separate the premises.

Question 47

Example of an underletting

Answer 47

A law firm occupies floors 2 to 4 of an office building on a 15 year lease ending on 20 November in four years’ time. The partners decide that they no longer need floor 2. The lease allows them to underlet each floor separately. They underlet floor 2 to a recruitment consultant for a term ending on 19 November in four years’ time.

Question 48

3.3 Qualified covenants against underletting

Answer 48

A tenant’s covenant against underletting of whole may be qualified, meaning that underletting is only allowed with the landlord’s consent. As with assignment (see the relevant section), a qualified covenant against underletting is automatically converted to a fully qualified covenant and the decision must be made within a reasonable time.

Question 49

Except for the permitted part

Answer 49

A commercial lease may contain an absolute covenant against underlettings of part, except for a permitted part (such as the floor of an office building in the previous example), and a fully qualified covenant against underlettings of the whole or a permitted part

Question 50

What constitutes reasonable withholding

Answer 50

The considerations for what constitutes reasonable withholding of consent are similar to that for assignment. The landlord is equally concerned with the ability of the undertenant to pay the rent and perform the obligations of the lease as in certain instances the undertenant may become the direct tenant of the landlord.

Question 51

Do not talk in terms of conditions and circumstances

Answer 51

Unlike assignment, lease covenants regulating underletting do not talk in terms of conditions and circumstances on which consent may be reasonably withheld. The transaction is somewhat less risky for the landlord in that the tenant remains primarily liable for observing the covenants under the lease.

Question 52

Landlord is able to restrict the underletting

Answer 52

However, the landlord is able to restrict the underletting, and will normally do so in a commercial lease. These restrictions are concerned with what would happen if the undertenant becomes the direct tenant of the landlord.

Question 53

Typically, the lease will prevent the tenant from underletting the premises:

Answer 53

* together with property that do not belong to the landlord * on payment of a lump sum (as doing so likely means that the tenant is not paying a full market rent) * with a rent free period beyond what is normal in that market

Question 54

and may require that the underlease:

Answer 54

* is at a rent no lower than that in the tenant’s lease (but this makes it difficult for the tenant to underlet in a falling market) * contains covenants no less onerous than in the tenant’s lease

Question 55

3.4 The undertenant’s liabilities to the landlord 3.4.1 Privity of contract

Answer 55

In the section on assignment, you have seen that, at common law, privity of contract is the ability of the original parties to a contract to enforce the obligations against each other, even after the contract has been assigned. Privity of contract works slightly differently in an underletting: * Privity of contract exists between the landlord and the tenant. * It also exists between the tenant and the undertenant. * However, it does not exist between the landlord and the undertenant

Question 56

3.4.2 Privity of estate

Answer 56

As you also saw in the section on assignment, by contrast, privity of estate is the ability of the landlord and tenant for the time to enforce the provisions of a lease against each other. However, not all obligations are enforceable under privity of estate. In an underletting: * Privity of estate exists between the landlord and the tenant. * It also exists between the tenant and the undertenant. * However, it does not exist between the landlord and the undertenant.

Question 57

3.4.3 Direct covenant

Answer 57

As there is neither privity of contract nor privity of estate between the landlord and the undertenant, the landlord is not able to enforce covenants against the undertenant. The landlord will therefore usually want the undertenant to covenant directly with the landlord.

Question 58

3.4.3 Direct covenant

Answer 58

A direct covenant can be given by the undertenant to the landlord in the licence to underlet (for detail, see the section on licences to assign and underlet). There is no equivalent of an authorised guarantee agreement for underletting, as the tenant remains liable to the landlord in any case

Question 59

Assessment focus point

Answer 59

Underletting terminology can be confusing, as it is relative. For example, you can talk about the landlord, tenant and undertenant. Alternatively, you can refer to the same individuals as the head landlord, landlord and tenant respectively. Either is fine – just be careful to be consistent, and make sure in an assessment question that you understand the relationship between the parties, however they are described.

Question 60

Sub pre-fix is used interchangeably with under

Answer 60

To add to the confusion, you can also see subletting, sublease and subtenant in place of underletting, underlease and undertenant. The sub- prefix can be used interchangeably with under- here, although again it is best to stay consistent. For the purpose of this and subsequent sections, the terminology landlord, tenant and undertenant is adopted.

Question 61

3.5 Underletting summary

Answer 61

* Underletting involves the tenant creating an underlease to the undertenant * Underletting can be useful to a tenant who does not need all of the premises, or does not need them for the time being. * A lease may contain an absolute covenant, qualified covenant or fully qualified covenant against underletting.

Question 62

3.5 Underletting summary

Answer 62

* A qualified covenant is converted by statute to a fully qualified covenant with the additional requirement that the landlord make its decision in a reasonable time. * After underletting, the tenant remains liable to the landlord for its covenants. * After underletting, the undertenant is liable to the tenant for its covenants, but will generally be required to give the landlord a direct covenant, as otherwise it is not liable directly to the landlord.

Question 63

Underletting procedure 4.1 The underletting procedure

Answer 63

The procedure of underletting is a grant of lease transaction. But there are additional considerations given the involvement of the headlease and the head landlord. As with a grant of lease, exchange of an agreement for lease (underlease) may be skipped, depending on the particular transaction and, if that is the case, the pre-exchange and precompletion steps would be undertaken at the same time.

Question 64

Common instance of underletting

Answer 64

A common instance of underletting is when an owner of a leasehold flat (say 99 years) lets it on an assured shorthold tenancy (say 6 months). However, underletting of commercial property tends to be much more complicated than this.

Question 65

4.2.2 Consent application

Answer 65

As with assignment, the tenant’s solicitor will usually apply to the landlord for consent early on in the transaction, as the whole transaction hinges on this being successful.

Question 66

Give an undertaking cost

Answer 66

The landlord’s solicitor will require the tenant’s solicitor to give an undertaking for costs before beginning work. Once the undertaking for costs is in place, the landlord’s solicitor will prepare the draft licence to underlet.

Question 67

See the draft underlease

Answer 67

The landlord’s solicitor will also want to see the draft underlease to ensure that it will comply with the tenant’s obligations under the lease.

Question 68

4.2.3 Drafting the underlease

Answer 68

The tenant’s solicitor will need to draft the underlease. Unlike a freehold owner granting a lease, a tenant granting an underlease is usually very limited in what provisions they can offer. For example, the tenant’s lease will usually require the underlease to contain obligations no less onerous than the tenant’s (eg if there is a full repairing covenant in the lease, there must also be a full repairing covenant in the underlease).

Question 69

Underlease may be a full form lease

Answer 69

The underlease may be a full form lease, which will look similar to the tenant’s own lease, or it may be a lease by reference, which incorporates sections of the tenant’s lease by reference (eg, it may define the “tenant’s covenants” as the tenant’s covenants in the tenant’s lease, and then contain a covenant for the undertenant to observe the tenant’s covenants). The term granted by the underlease must be less than the remaining term of the tenant’s lease, even if only one day less.

Question 70

4.2.4 Agreement for underlease

Answer 70

As with a grant of lease, it is not always necessary to have exchange at all. If exchange does take place, then the tenant’s solicitor will draft an agreement for underlease. As with an agreement for lease, this may set the completion date in the future and may make the completion conditional on various matters

Question 71

Example Agreement for underlease

Answer 71

The tenant has applied to the landlord for consent to the underletting. The consent application is taking a long time through no particular party’s fault, but both tenant and underlessee are anxious to commit themselves to the underletting

Question 72

May exchange an agreement

Answer 72

They may exchange an agreement for underlease conditional upon the landlord’s consent, allowing them to complete as soon as the landlord is ready to give it.

Question 73

4.2.5 Investigation of title, searches and enquiries

Answer 73

The undertenant’s solicitor should generally carry out the same investigation of title, searches and enquiries as the tenant’s solicitor in a grant of lease (see the section on grant of lease procedure). However, one important difference is that, rather than the landlord deducing its freehold title, the tenant will need to deduce its leasehold title as follows:

Question 74

4.2.5 Investigation of title, searches and enquiries

Answer 74

* if the lease is over seven years, then the tenant need only provide an official copy of its registered leasehold title; * if the lease is seven years or under, then the tenant will need to provide an official copy of the landlord’s freehold title together with a copy of the lease As with the grant of lease, it is possible that the undertenant may not want their solicitor to do full scale investigations if it is a short-term letting.

Question 75

4.3 Exchange

Answer 75

On exchange of an agreement for underlease: * the tenant’s solicitor and undertenant’s solicitor exchange in similar manner as for a freehold contract (usually adopting Law Society B) * no deposit is usually payable

Question 76

4.3 Exchange

Answer 76

* the agreement for lease may set a fixed completion date, but more likely will set out what conditions need to be satisfied and by when for completion to take place * the agreement for underlease will usually have a draft of the agreed form of underlease annexed to it, so it can only be exchanged once the terms of the underlease have been agreed

Question 77

4.4.2 Pre-completion - steps

Answer 77

A completion statement will be prepared, just as with a grant of lease. Note that it is the rent under the underlease that is payable, however, not the rent under the tenant’s lease. The underlease will likely require an appropriate sum from the undertenant for service charge and insurance rent to cover the corresponding obligations of the tenant.

Question 78

4.4.2 Pre-completion - steps

Answer 78

If it is an underletting of the whole of the tenant’s interest, then an OS1 search is carried out against the tenant’s registered leasehold title. If it is an underletting of part of the tenant’s interest, then an OS2 search is carried out against the appropriate part of the tenant’s registered leasehold title.

Question 79

4.4.2 Pre-completion - steps

Answer 79

Where the underlease is not registrable, an OS3 search may be carried out against the tenant’s interest to check whether any adverse entries have been made since the date of the last copy of the tenant’s title register. It would not be appropriate to carry out a search with priority against the landlord’s freehold interest, as the underlease is not granted out of the freehold.

Question 80

Assessment focus point

Answer 80

There are slight differences with the pre-completion steps for a grant of lease, assignment of lease and underletting. It is easier to think about and understand the differences than try to learn the pre-completion steps for each type of transaction.

Question 81

4.5 Completion

Answer 81

On completion of the underlease : * the parties’ solicitors agree to date and complete the licence to underlet * the undertenant’s solicitor sends the tenant’s solicitor the completion monies * the tenant’s solicitor and undertenant’s solicitor agree over the telephone to complete and date the executed underleases that they are holding * the tenant’s solicitor and undertenant’s solicitor send the completed original and counterpart underleases to each other

Question 82

4.6 Post-completion

Answer 82

The Tenant’s solicitor will send notice of underlease to the landlord’s solicitor. The Undertenant’s solicitor will: * Arrange to submit SDLT or LTT return and pay appropriate SDLT or LTT if necessary * Register underlease if necessary

Question 83

4.7 Summary

Answer 83

* A grant of an underlease is very similar to a grant of a lease * The tenant and undertenant will be involved in the negotiation of the licence to underlet drafted by the landlord * Pre-exchange and pre-completion are similar, but the title investigation is a little different as it is the tenant’s title that the undertenant is primarily interested in

Question 84

4.7 Summary

Answer 84

* Completion will involve completing the licence to underlet and the underlease. * Post-completion will involve payment of SDLT and registration of the underlease, if appropriate. * The tenant will also need to serve notice of underletting on the landlord

Question 85

Licences to assign and underlet 5.1 What is a licence?

Answer 85

An assignment or underletting by the tenant will require the landlord’s consent. A commercial lease will typically require that any consent is given by deed (except in limited circumstances). The deed that gives the consent is the licence to assign or licence to underlet as appropriate.

Question 86

The requirement of consent

Answer 86

The requirement of consent to be in a deed is safer from the landlord’s point of view because it lessens the risk that the landlord inadvertently consents to something that it doesn’t mean to! Nonetheless, the landlord’s solicitor should take care not to say anything that could be construed as consent (even in principle) on behalf of the landlord.

Question 87

5.1 What is a licence?

Answer 87

It also ensures that the tenant’s covenants and any variations to the lease are given the requisite formality. The licence will usually contain a time limit on consent, so that the appropriate underletting or assignment must be completed within, say, three months. This avoids uncertainty on the part of the landlord, who will not want the process to go on indefinitely. In practice, the licence is usually completed just before completion of the transaction itself.

Question 88

5.1 What is a licence?

Answer 88

Unlike a licence for alterations, which contains numerous obligations about the work that is to be carried out, there are comparatively few obligations in a licence to assign or licence to underlet. If the licence is for assignment of an old lease or an underletting, the licence will contain a direct covenant by the assignee or undertenant to the landlord to comply with the tenant covenants in the tenant’s lease.

Question 89

Not strictly necessary

Answer 89

A direct covenant to the landlord is not strictly necessary with the assignment of a new lease, but the landlord may want it anyway. If the outgoing tenant on an assignment is giving an authorised guarantee agreement (see section on assignment), then this may be contained in the licence to assign, or it may be a standalone deed.

Question 90

Assessment focus point

Answer 90

Make sure you are clear on the liability of the parties to the landlord after an underletting, an assignment of an old lease, or an assignment of a new lease, and where the authorised guarantee agreement is appropriate (only for the assignment of a new lease).

Question 91

5.3 Notice of dealing

Answer 91

Following an assignment, the assignee, and following an underletting, the tenant, will be required to give the landlord formal notice within a month that the transaction has been completed. There will usually be a fee for the landlord’s solicitors receipting this notice.

Question 92

5.3 Notice of dealing

Answer 92

For a long residential lease, it is often the case that the lease may be freely assigned (eg on a sale of the house or flat), or underlet on short tenancies, without landlord’s consent. However, there will usually be a requirement to give notice of dealing for assignments of the lease. This is mainly so that the landlord for the time being knows to whom they should address the ground rent demands!

Question 93

5.4 Different forms of alienation

Answer 93

Assignment and underletting are not the only forms of alienation. There are other ways in which the tenant may be able to deal with their interest. This section looks at charging the lease and sharing occupation. A tenant may create a charge over their lease, just as a freeholder owner charges their interest to a mortgage lender. A commercial tenant may do this as part of a floating charge over their business generally. The bank taking the charge will want the benefit of the lease if taking the business into administration

Question 94

Residential Leaseholder

Answer 94

A residential leaseholder will do this when taking a mortgage. A tenant may want to share occupation with a third party without creating an underlease. Usually, a commercial lease will allow sharing with group companies. This is because from the landlord’s point of view, they can regard the tenant and its group companies as one entity – the landlord can still enforce the covenants against the tenant.

Question 95

5.5 2020 Code for Leasing Business Premises

Answer 95

The Code has various requirements on alienation. Some important ones: * Lease should allow tenants to assign or underlet the whole of the premises with the landlord’s consent not to be unreasonably withheld or delayed * Leases should allow tenants to share with group companies without consent. * Leases should allow tenants to charge the lease to a bank or reputable lending institution without consent (with a limited exception).

Question 96

5.6 Summary

Answer 96

* Landlord’s consent to assignment or underletting is documented in a formal deed being a licence to assign or licence to underlet respectively * The licence will be specific about the transaction allowed, and be limited in time * The assignee or underlessee will likely be required to covenant directly with the landlord in the new lease (except for the assignee of a new lease)

Question 97

5.6 Summary

Answer 97

* A licence to assign a new lease may also contain an authorised guarantee agreement * Other forms of alienation are charging a lease, or sharing occupation * The 2020 Code for Leasing Business Premises has a section relevant to alienation