What is an assignment of a lease?
An assignment of a lease occurs when a tenant (the Assignor) transfers all of its interest in a lease to another party (the Assignee). The Assignee then becomes responsible for performing the tenant’s obligations under the lease.
Generally, a tenant may not assign a lease without the landlord’s prior written consent, and that consent must not be unreasonably withheld or delayed.
When is it reasonable for a landlord to withhold consent?
Examples of circumstances where a landlord may reasonably withhold consent include where:
- The Assignee has not provided sufficient financial information demonstrating that they have the financial capacity to perform the tenant’s obligations under the lease; or
- The Assignee’s intended use of the premises may negatively affect the landlord’s interests.
Prior to giving consent, the landlord may request the following before considering a request for consent to an assignment:
- Sufficiently detailed financial statements and a credit history for the Assignee;
- Related experience and trading background of the Assignee;
- References and/or details of the Assignee’s proposed business operation; and
- Payment of the landlord’s reasonable legal and administrative costs.
How can landlords minimise disputes when considering an assignment?
It is essential to establish a clear and well-documented process to prevent disputes from arising. The landlord can:
- Promptly acknowledge and respond to the tenant’s request for an assignment;
- Clearly outline the information they require to assess the Assignee;
- Check the terms of the lease to understand what information the landlord can demand from an Assignor or Assignee;
- Provide clear reasoning as to why consent is being withheld; and
- Obtain legal advice before refusing consent or imposing conditions.
How can a tenant reduce the likelihood of their landlord withholding consent?
A tenant should ensure that its request for consent complies fully with the lease requirements and is supported by sufficient information. For example the tenant can:
- Notify the landlord about the assignment as early as possible;
- Provide the reasonable information required by the landlord to assess the Assignee;
- Ensure that the Assignee understands their obligations under the lease;
- Agree to pay the landlord’s reasonable fees and administrative costs; and
- Obtain legal advice before requesting to assign the lease.
Case study
We recently acted for a landlord of a serviced apartment complex. The tenant wanted to assign its lease to a company that was a newly incorporated company.
The proposed assignee company had a sole director and shareholder with experience in hotel management and provided financial information relating to various related companies, however, insufficient financial information was provided for the assignee itself.
Given the lack of sufficient direct financial information, the landlord consented but this was conditional upon the sole director and shareholder of the assignee providing an unlimited personal guarantee.
This raised a familiar issue: when a financially strong tenant proposes to assign its lease to a shell company, it is essential for the landlord to consider the financial strength of the Assignee. Although the proposed Assignee was associated with other established entities, those entities would not be liable under the lease unless they agreed to provide a guarantee. In those circumstances, it was reasonable for the landlord to require the director and shareholder to provide an unlimited personal guarantee as a condition of consent.
The landlord is entitled to require a guarantee they can pursue if the Assignee fails to meet their obligations under the lease.
If you have any questions about an assignment of lease, please get in touch with our Property Team or your usual contact at Hesketh Henry.
The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
