Alienation plays a key role in the transfer of, or dealings with, leasehold interests within the commercial property sector. Whilst the term itself may indeed seem ‘alien’ to most, at some point or another commercial landlords and tenants alike will find themselves in a position where alienation must be considered if they are to lawfully complete relevant property transactions. Hebe Shepherd writes this useful guide;
So, What is Alienation?
Alienation provisions in a lease refer to clauses that outline the conditions and limitations under which the tenant can transfer or dispose of (“alienate”) their interest in the lease to another party.
These provisions typically specify whether the tenant can assign, sublet, share occupation, or charge the property, and if so, what conditions must be met. They help regulate the transfer of the leasehold interest to ensure that the landlord maintains control over who occupies the property.
From a landlord point of view, these clauses are essential if a landlord is to maintain control over the use and occupancy of their property. From a tenant perspective, well drafted alienation clauses can allow a tenant to dispose of their interest in their lease, providing them with a greater level of flexibility.
Common Clauses:
The most common alienation clauses that we expect to see in a lease concern either the assignment or subletting of the whole lease.
Assignment:
The assignment clause within a lease will dictate a tenant’s ability to transfer their entire leasehold interest to a third party. Upon completion of the assignment, this third party (the assignee), will then become the new tenant for the remaining duration of the lease term. It is not uncommon for landlords to impose conditions on both the incoming and outgoing tenant within the assignment clause in order to protect their own commercial interest.
Subletting:
Subletting clauses will govern a tenant’s right to lease part or all of the leased premises to a third party (subtenant). As mentioned above, if subletting is permitted landlords will often impose conditions or obligations on both the tenant and subtenant within a lease’s subletting clause.
Common Legal Obligations in Conjunction with Alienation:
As mentioned above, alienation provisions within a lease can and often do impose legal obligations on both landlords and tenants. It is significant that these clauses are studied carefully to ensure that all parties understand these obligations and the restrictions and limitations that they can impose.
Below is a summary of the most common obligations that we see within alienation provisions and that should be carefully considered by both commercial landlords and tenants:
Landlord Consent:
When alienation is permitted, it is often a requirement that prior landlord consent is sought.
From a tenant point of view, it is important to know who your landlord is in order to ensure that is applied and obtained from the correct party, i.e. is it an individual or a company; if it is a company, are you contacting the relevant individual to obtain lawful consent. It is also significant to understand your landlord’s requirements. Landlords are perfectly entitled assess factors such as the financial viability of the proposed assignee or subtenant, their intended use of the premises, and compliance with lease obligations. If these are not met, then your request is likely to be denied. There are limitations on landlord’s consent however, whereby landlords are not able to unreasonably withhold or delay their consent to alienation from a tenant.
Compliance with Lease Terms:
For a tenant looking to sublet their leasehold interest, they may find difficulties in doing so if they themselves have not complied with the terms of their lease. Such terms may include the payment of rent or maintenance and repair responsibilities. Failure to comply with lease terms may lead to refusal of authority to sublet, or even a breach of lease followed by termination.
Authorised Guarantee Agreement:
It is not uncommon for landlords to impose an obligation on tenants to enter into an authorised guarantee agreement upon assigning or subletting a lease. If entered into, this essentially gives the landlord the right to claim back any rent unpaid by the incoming tenant (the assignee) from the outgoing tenant (the assignor), from any time until either the lease is reassigned, or until the end of the lease term.
This is an extremely common provision within commercial leases and so it is vital that both landlords and tenants understand the implications and what exactly this imposes on them in order to avoid any potential nasty surprises in the future.
How we can help
The amount of information about a commercial property or development site can feel overwhelming, but our property law experts can help you decide what is important and explain any significant issues. The better informed you are before you commit to a purchase, the more likely you are to end up with a successful investment.
For further information, please contact Hebe Shepherd, paralegal in the commercial property team on 01803 225132 or email [email protected]
Hebe Shepherd, Paralegal, Commercial Property
