Jun 7, 2011

A short summary of the commercial lease assignment

Commercial Lease Assignments

Lease assignments are transfers of Lease from one tenant (Old Tenant) to another (New Tenant) subject usually to conditions under the Lease and permission in the form of a Licence to Assign  from the Landlord to do so. References to the Parties means the Old, New Tenant and the Landlord.

What is a Lease?

The Lease is a contract which will for all intents and purposes regulate all the Parties' dealings in connection with the property, it is subject though to limited statutory control particular in the commercial sector.

What is a Rent Deposit Deed?

A Rent Deposit Deed is an agreement between the Landlord and Tenant as to what terms the rent deposit
paid by the Tenant is to be held and how. It may regulate the withdrawal, maintenance and topping up of the deposit. This must be carefully agreed and balanced between the parties.

Background.
Most Leases are quite onerous, and are generally more favourable to the Landlords, then they are to the Tenants. From the outset a new Tenant who has never been in such a transaction should accept that the Landlord's only commercial aim is to collect the rent, spend a minimal amount on his own obligations and pass all responsibility for repairing and insuring over to the Tenant. Expert advice is always recommended and cost cutting and saving should be avoided as Tenant will be agreeing to enter in to the Lease which will run for several years. Typically an assignment of Lease, the process may take about 20-30 hours for a solicitor to complete properly with full advice. Be very weary of costs being a few hundred pounds, very often there will be minimal amendment and no property or lease report for this price. Usually their is no motivation for a solicitor to spend any great effort on the detail of the transaction as shown below;

1. The Landlord,  New Tenants and Old Tenants respective solicitors will be in contact with each other to confirm that they have been authorised to act by their respective clients.
2. Unless otherwise agreed, each party will pay their own legal costs as under Costs of Leases Act 1958. (tip, make sure the New Tenant's solicitor carefully agrees how and when the Old Tenant and Landlord legal costs are quantified and payable and obtains his clients approval).
3. The Old Tenant's solicitor will then enclose by post and /or electronic mail amongst others the following documents, the copy  Lease, various insurance policies, fire safety report, asbestos report, responses to Commercial Property Standard Enquiries,planning documents and proofs, H.M Land Registry Official Copies of the Old Tenant and Landlords superior title. The Landlord in most cases but not all will be the Freehold Proprietor of the superior title. There sometimes can be a contract especially if there is a premium being paid for the lease. (Tip, always avoid if at all possible in paying a premium for a lease as a lease is a depreciating asset and paying a premium, any premium should be independently valued in conjunction with the lease terms)
4. The  New Tenants Solicitor will examine all the documents including the Lease .  The Leasehold and Freehold Title will also be checked to ensure the Old Tenant and Landlord named are the Proprietor of the respective titles.
5. The New Tenants Solicitor may raise further enquiries for the Old Tenant's Solicitor to answer or respond appropriately.
6. The Old Tenant will at the same time apply to the Landlord's solicitors for a Licence to Assign and the Landlord may raise enquiries as required to ensure the New Tenant is suitable to take the Lease on. Sometimes there may be conditions that the Old Tenant has to act a guarantor for the New Tenant. The Old Tenant would be aware of this requirement. (tip, regardless of what the Lease says, always try and find away for the Old Tenant to be fully released by asking a higher deposit and longer advance payment of rent upon completion from the New Tenant). This is known as an Authorised Guarantee Agreement and their are usually to be discouraged unless the Landlord can establish that the New Tenant is of weaker financial standing or registered abroad. The Commercial Lease code although is not law, is of useful guidance here and AGAs should be avoided if at all possible.
7. The New Tenants Solicitor who has completed all enquiries and is satisfied now has to report to the New Tenant all legal matters, such the terms of the Lease and Rent Deposit and other relevant information.
8. The New Tenant should consider the Report and decide whether it wishes to go ahead and be bound in the transaction. (Tip, If the transaction does not meet the New Tenant's aims and objectives, the Tenant should not be afraid to withdraw, you are not bound to complete the transaction).
9. Usually rent is paid quarterly on quarter days which are traditionally Lady Day (25 March), Midsummer Day (24 June), Michaelmas Day (29 September) and Christmas Day (25 December) but if the Lease is completed on days which are not quarter days, then apportioning will take place.
10. The Landlords solicitors have agreed to provide the Licence to Assign and this is provided to the Old Tenants solicitors usually as 1 Licence and 1 or 2 counterparts. They are also likely to send a new Rent Deposit deed and will usually receive the deposit in advance of completing the Licence, or they choose to complete simultaneously with the transaction between the Old and New Tenant Solicitors.
11. The amount of advance rent, deposit and any other costs are provided in advance to the respective Old Tenant and Landlord's solicitors by the New Tenant's solicitors.
12. There is usually no need to complete a formal assignment deed unless some other rights are passing such as goodwill as the transfer deed TR1 will suffice.
13. The New Tenant will usually have taken occupation of the Property by this point and commenced getting registered for the utilities, business rates and waste collection.
14. The Lease and other documents such as transfer deed TR1 and Licence to Assign are sent to the New Tenant so that it can be registered either voluntarily or by law at the Land Registry.
15. The New Tenant's solicitor will if required complete a Stamp Duty Land Tax return and pay any tax due before completing the registration if tax is calculated to be due under the lease formula for commercial leases with http://www.hmrc.gov.uk/sdlt/calculate/calculators.htm.
16. Old Leases which came into effect before 01 January 1996, may require the New Tenant to enter into with the Landlord a Deed of Covenant, although the lease terms which touch and concern the property can be enforced under the assumed relationship of Landlord Tenant, certain positive obligations may not be enforceable if personal to the original Tenant. Leases after this date will not require the Deed of Covenant as the Landlord & Tenant (Covenants) Act 1995 will apply in releasing the old tenant after assignment but note my point above and below about AGAs which are allowed under the above provision.

How do AGA's work.

Landlord------------Tenant A have the original Lease

Tenant B wants to take the Lease from Tenant A

so it will be

Landlord ----------Tenant B but------Tenant A will guarantee Tenant B to the Landlord
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Only when Tenant C takes the Lease from Tenant B will the Tenant A be released from the guarantee.

Landlord------------Tenant C---------Tenant B                 Tenant A released.
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This is summary for information only and is not intended to be an exhaustive guide.Saving money in the initial stage is false economy, we have seen many commercial tenants who have been ruined by leases that were not explained in there effect please do not become one of them!