Assignment of commercial leases

If your business needs to exit its current leasehold unit and you have lined up a willing assignee to take over your space, you will need to ensure that your landlord is happy to consent to the change of occupant.

However, your liabilities relating to that lease will generally not come to an end upon assignment.

On assigning a lease and exiting a commercial unit you will wish to reduce the risk of being pursued by your former landlord in regard to any breaches in the lease terms by your successor.

However, landlords may be able to pursue you, dependent upon the age of your lease and whether there is an authorised guarantee agreement:

• if your lease was granted pre-1996, then landlords can look to any former tenants to be liable for a breach by the current tenant. It might be that the lease has been assigned several times since you were the tenant. That does not matter, the landlord can still pursue you for breaches by the current tenant.
• if your lease was granted post-1996, then landlords are more restricted in who they can pursue. Normally they will require that you provide an authorised guarantee agreement on assignment of the lease. The advantage of this agreement is that the liability to guarantee your successors’ obligations comes to an end when your immediate successor assigns.

What is an authorised guarantee agreement?

This is a special form of guarantee that specifically applies to leases granted from 1996 onwards. They were created by statute and are frequently imposed as a condition of a landlord giving consent to the assignment of a lease.

Your landlord’s solicitors will generally present you with their standard form of document. Sometimes this can be negotiated to create a slightly more preferential position for you.

An authorised guarantee agreement requires you to guarantee the performance of the lease obligations by the assignee. Following assignment, if the assignee breaches a lease covenant, then the landlord will be entitled to look to you, or the relevant successor, to make good that breach.

Most leases entered into after 1996 make the landlord’s consent to assign the lease conditional upon the assignor providing an authorised guarantee agreement. You will not receive your landlord’s licence to assign unless you enter into an authorised guarantee agreement.

The agreement lasts until your assignee in turn assigns the lease. If the assignee does not assign, then you will remain liable until the expiry of the lease.

For example, a lease for 15 years is granted to company A, who assigns to company B after 5 years. At the point of assignment, company A grants an authorised guarantee agreement for company B’s liabilities to the landlord as a condition of obtaining landlord’s consent. Company A’s liability under the agreement is limited to company B’s breaches alone. After 10 years, if company B then assigns to company C (in accordance with the terms of the lease,) then company A’s liability automatically comes to an end.

In very limited circumstances the authorised guarantee agreement lasts beyond a second assignment, for example if company B did not obtain the landlord’s consent before assigning to company C. In this case, company A’s liability under the agreement would last until the next assignment authorised by the landlord.

In certain limited circumstances the agreement can be discharged before the usual expiry date. The actions of a landlord can sometimes result in the discharge of an authorised guarantee agreement, for example the material variation of a lease without the guarantor being a party to it.