Transfers & Sub-Leases
Transfer of the Lease by Tenant
“Assignment” is the process whereby a tenant transfers his interest in the property to another tenant and is usually thereby released from the lease obligations. If the lease says nothing, the tenant is free to assign. Most leases, therefore, contain restrictions on assignment.
Nearly all leases of more than 5 years, allow for the tenant’s right to assign, subject to the landlord’s consent, which is not to be unreasonably withheld. There will usually be an absolute prohibition on dealing with part of the property (e.g. selling part).
Statutory Rights to Assign & Sub-let
The Landlord and Tenant Act provides that notwithstanding anything to the contrary in the lease, where there is a restriction in a lease in relation to assignment, sub-letting, charging or parting of possession without landlord’s consent, then such consent must not be unreasonably withheld.
What is “reasonable” will depend on the entire circumstances. A tenant can apply to the court for a declaration that the landlord is acting unreasonably. Where the above provisions apply, it will be a matter for the court to decide what is or is not reasonable.
The courts have said that the Landlord is only entitled to refuse consent for reasons that are based on the relationship of landlord and tenant. The court will not interfere if the conclusions which were reached, might be reached by a reasonable landlord. The landlord need not prove his conclusions were in fact justified.
Consent Considerations
The landlord is entitled to consider the application on the basis of its own interests. There may be cases where there is such disproportion between the benefit of the landlord and the detriment to the tenant, that the refusal could be deemed unreasonable.
Generally, a landlord is not entitled to insist on a tenant of equal strength to the assigning tenant. If the outgoing tenant is able to show that the incoming tenant has sufficient resources and ability to cover the lease obligations (perhaps by offering a guarantee where necessary) he will generally be entitled to consent to the assignment of the lease.
Other considerations which may justify refusal of consent include existing breaches of the leases, the possibility that the assignee might compete with the landlord’s other tenants and the possible devaluation of the landlord’s interest.
Sub-Leases by the Tenant
A sub-lease is a lease made by a tenant in favour of another tenant, usually referred to as a sub-tenant. Landlord’s consent will usually be required for the sub-lease, under the terms of the lease. It is vital from the investor’s point of view that the sub-lease does not undermine the value of the investment.
Applications for consent to a sub-lease should be considered very carefully. A sub-tenant can itself obtain statutory rights of renewal and compensation so that it is vital that appropriate provisions are made in the consent “licence” document.
A sub-lease can be of all or part of the leased property. With a sub-lease, there will not usually be a direct relationship between the head landlord (i.e. the landlord under the original lease) and the sub-tenant. However, the terms of the consent for the grant of the sub-lease may change this position, so that the sub-tenant undertakes directly with the head landlord to comply with the terms of the sub-lease and/or the head lease insofar as they affect the property concerned.
In the case of a sub-lease, the original tenant is fully “on the hook” for the rent and all other obligations. The tenant has rights and obligations under the sub-lease as against the sub-tenant and the tenant remains fully liable on his lease covenants to the landlord (unlike in the case of an assignment).
Sub-Lease Issues
Leases will often set out in detail, mandatory provisions which must be contained in a sub-lease. A well-drafted lease will specify in detail the types of conditions that must be imposed by a tenant in a sub-lease, (provided the landlord’s consent is forthcoming).
It is important for the landlord to ensure that consent is not given for a sub-lease which would undermine the investment. Therefore, the sub-lease should be at market value and with no premium.
It is essential that the sub-lease covenants comply with the main lease covenants. It is often provided that the rent reviews take place in tandem with the head lease rent review. Some leases provide that the sub-lease rent cannot be less than the lease rent.