Business lease assignment

Article reference: UK-IA-LSE09
Last updated: December 2020 | 6 min read

Because a leasehold interest is a temporary right to possession and occupation, a sale of that right could be confused with a sale of the property itself. For this reason the old word “assignment”, meaning transfer, is still used.

Assigning a lease as part of a business sale

Leases for terms under 7 years are most commonly assigned when a business that rents its premises is sold, and the buyer wishes to continue occupying the property under the same terms as the seller.

However, the lease assignment is usually dealt with by its own separate document (and not in the business sale agreement). This conveniently separates the deal, in part so that the landlord can join in the assignment to give his permission.

Most leases provide that the tenant can assign his lease only if he assigns all of the premises and only if the landlord approves the incoming tenant. That is only fair, because the landlord needs to be confident that the new tenant will not wreck his property, upset the neighbours or fail to pay his rent.

An assignment allows a revaluation of the lease

The value of a lease is the annual value of possession at the time of the valuation, less the cost of rent and other expenses payable to the landlord.

It follows that when rents are rising, a lease with a long period between reviews, or with no reviews, will acquire an additional value to the tenant - called the premium.

The outgoing tenant can realise the increase in value of the lease by selling it for the premium.

A lease can also have a negative value. If a trader wants to downsize and take smaller premises, he must nevertheless continue to pay rent for the premises where he is now - unless he can assign them to someone else. If the rent is high, his assignee might be willing to pay only a fraction of the true rent, for the remainder of the lease term. So the seller of the lease will have to continue to make up the rest.

This situation is usually resolved by a single lump sum payment by the seller to the incoming assignee, up front. This is called a reverse premium.

Negotiating an assignment

Depending on the terms of the lease, the tenant may have to satisfy the landlord on other points too. For example, a guarantor may be required.

Before you start looking closely at people willing to take over your business lease, talk to your landlord and find out what he wants. There may be scope for negotiation.

It is usual to instruct a commercial estate agent to advertise and negotiate your assignment. The fee is always negotiable. It will depend largely on the residual value of the lease, and the current rent. If the level of money barely justifies the time of a professional agent, you could advertise and sell your leasehold personally.

It is always worth your while personally to attend on prospective assignees, leaving the agent to advertise and "field" the enquirers.

Using a solicitor

Once you have appointed the agent, find a commercially minded solicitor and get a price for the legal work in the assignment. He will be reluctant to give a fixed price because a slow solicitor on the other side will cost him extra time, but a fixed price will be available if you are firm.

When you have a deal, put it to the solicitor. Since you are selling, you do not need to be involved in the legal matters - except to be sure that you do not say "yes" to something where the proper answer should have been "no".

Allow plenty of time for the transaction to be completed.

Managing the transaction yourself

If you know a little about how a property transaction works, you could use the Net Lawman assignment agreement for a business lease and do everything yourself.

Ongoing liability of first tenant after parting with the lease

If your business lease started after the 1st January 1996, then you are not liable under any circumstances for any rent arrears that arise after you have assigned the lease to a new tenant.

If your business lease is dated before that date, then your landlord may be able to ask you for all of the rent he has not already received in respect of the period from the date of your assignment of the business lease, right up to date. However there are some conditions:

  • you have to be the original first tenant
  • the landlord must serve notice on you within six months of the arrears first falling due
  • if the rent is increased since you assigned the property, and the increase is dated after 1st January 1996, then the extra rent is not your responsibility
  • the landlord can ask you for rent only at the rate you were paying at the date of your assignment. However, if the rent review is before 1996 but after your assignment, you might be liable for the full increased rent
  • the landlord has to get the figures right. If you can show that the figures he claims are wrong then you don't have to pay anything

If you have to pay up for the obligations of a failed assignee, the law gives you three options. You may either:

  • occupy the premises again yourself; or
  • find another tenant so as to remove your future liability; or
  • try to recover your rent by chasing the assignee through a claim in court

The landlord will have made a decision as to whether to bother issuing a claim against the defaulting tenant or against you. If he sees you as a softer target, then it may be worth your while to claim against the tenant in court.

If you take a business lease you have to accept all the changes to it that have taken place, including any rent reviews and responsibility for any dilapidations.

Unless the values are very small, this is an area where you should take advice from a surveyor or solicitor. Remember in particular that if the landlord gets the figures wrong he may not claim at all.

There are other less important areas that we have not covered in these notes.

Further information

You may be interested to read further on buying a business, terms in a property lease, or ending one.

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