We are often approached by clients looking to take over an existing lease. These transactions are called “assignations”, and the lease is “assigned” from the “assignor” (the outgoing tenant) to the “assignee” (the incoming tenant).
Has anyone ever suggested that lawyers like to complicate things? Surely not, but in any event let’s disabuse you of that thought! In this blog we’ll consider some of the key things that the assignor and the assignee will want to get sorted out nice and early, so that their assignation proceeds swiftly and smoothly. Often, solicitors are involved at this early stage to provide advice on these various elements.
In the current market, it’s unusual for an assignee to pay a premium to the assignor (or vice versa) for an assignation. All will depend on the terms of the lease, the parties bargaining strength and negotiating position. Does the assignor want out more than the assignee wants in?
Potentially the most important point to consider is that the assignor and the assignee may not be able to complete the assignation alone. The parties/their solicitors should review the lease, and establish whether the assignation requires the consent of the “landlord” (the owner of the property).
If the lease is silent on the right of the tenant to assign, then no consent is required from the landlord. It would be more common, though, for the tenant to require consent from the landlord (such consent not to be unreasonably withheld) before the lease is assigned. The landlord may (for example) be prohibited from withholding consent, provided the assignor can demonstrate the assignee is demonstrably capable of complying with the tenant’s obligations under the lease. The lease may contain wording entitling the landlord to withhold consent if the assignor is in arrears under the lease, or where there is a material breach of the lease.
Often, the Landlord will require covenant/financial information of the assignee and may then ask for a rent deposit or guarantee if it’s not satisfied with what’s provided.
Assignor’s Clean Break
The assignor will generally want the assignation to be a clean break, with the assignor being released from all obligations under the lease and with the landlord waiving any claims against the assignor.
Assignee Responsible for Existing Breaches
If the landlord is waiving any claims against the assignor, the landlord will usually require the assignee to be on the hook for the tenant’s obligations under the lease – whether the obligations arose before or after the date of the assignation. That way, if there are existing breaches of the lease at the date of the assignation, the landlord knows it can require the assignee to remedy those breaches.
It may be that a compromise is reached with the assignee taking on responsibility for (A) “payment obligations” from the date of the assignation onwards (ie assignee cannot be asked to pay rent for the period prior to the date of the assignation) and (B) all “non-payment” obligations (eg the repair obligation), whether occurring before or after the date of the assignation.
State of Repair
Before committing to the assignation, the assignee should inspect the leased property, and consider whether it is in the condition that complies with the tenant’s obligations under the lease. If the leased property is in a worse condition (which would often be the case), the landlord may require the disrepair to be sorted before consent is granted to the assignation. Alternatively, the landlord may, after the assignation completes, give notice to the assignee requiring the assignee to remedy the disrepair. That could be expensive: the assignee should consider having the leased property surveyed.
If the assignee is taking on the tenant’s obligations arising before the date of the assignation, the assignee could seek some confirmation from the landlord what are the existing breaches. Whether that’s provided or not, the assignee should calculate the potential cost of sorting the breaches.
The usually accepted position is that the assignee takes on the property “as is” and is therefore responsible for the condition of the property and the lease repairing obligation under the lease. That can be taken into account in the negotiation of the deal with the assignor (eg whether a premium is paid by one party to the other).
When inspecting the leased property the assignee should consider if the leased property is ready for the assignee’s immediate occupation and use. Often, the assignee would want to carry out “fit out works” (whether that’s installing partitioning, kitchen facilities or other alterations). The lease should be reviewed to determine whether such works require the landlord’s consent. If consent is required, the assignee should obtain that consent as part of the assignation. If no consent is obtained, the assignee would need to seek consent from the landlord later on, at additional cost – and there is no guarantee that consent would be obtained.
A Fair Lease?
More generally, the assignee should review the entire lease (and any variations of the lease), and consider whether the obligations on the tenant are acceptable. If the assignee wants the lease to be varied, (eg changing some of the tenant’s obligations), this would require consent/approval from the landlord. The landlord is not required to agree to any such changes and would usually be reluctant to do so.
A lease will generally require rent to be paid monthly or quarterly in advance. The landlord is unlikely to repay the assignor any rent that has been pre-paid by the assignor in respect of the period after the date of the assignation. The assignor will therefore want the assignee to re-imburse the assignor for that pre-paid rent and that will be covered in the contract between the assignor and assignee.
The assignor and the assignee should consider whether they are each bearing their own costs (eg solicitors and surveyors) in relation to the assignation – and also how the landlord’s costs will be apportioned between them (the landlord will require its costs to be covered by the assignor/assignee).
Depending on the terms of the assignation and the history of the lease, there may be an obligation on the assignor to submit a Land and Buildings Transaction Tax (“LBTT”) return. Similarly, the assignee may assume responsibility for future LBTT returns required in respect of the lease (and responsibility for any existing breaches of LBTT legislation).
An assignation is not simply a case of the assignor and assignee agreeing that keys for the leased property will be handed over on a given date. But, with the parties considering and sorting out the key issues early on, potential hurdles and delays to the transaction can be side-stepped, so the deal completes as slickly as the parties might have envisaged.
This is not legal advice. Please consult a solicitor for advice in relation to any individual or specific transaction.
For help and advice on commercial property matters please contact a member of the Blackadders’ Commercial Property team working in Aberdeen, Dundee, Edinburgh, Glasgow, Perth and across Scotland.