Leases in the retail sector: Alienation

Assignment

Assignments of the whole lease are generally allowed, provided the landlord’s consent is obtained, which must not be unreasonably withheld or delayed. However, assignments of part of the property are typically prohibited. When assigning a lease, the landlord and tenant will need to agree on conditions, with one of the most significant being the requirement for an authorised guarantee agreement (AGA).

The Landlord and Tenant (Covenants) Act 1995 introduced the concept of the AGA, which is relevant for leases granted after 1 January 1996. Under this Act, the original tenant is released from liability upon assignment of the lease, but landlords may require the original tenant to enter into an AGA. This AGA guarantees the performance of the incoming tenant. If the incoming tenant fails to meet its obligations, the landlord can pursue the original tenant under the AGA for any losses suffered and/or could require the original tenant to take a new lease of the premises for the remainder of the original term.

Historically, it was common for leases to require the outgoing tenant to provide an AGA on assignment. However, the Lease Code 2020 now suggests that an AGA should only be required where the landlord reasonably requires it. In practice, a landlord should not be placed in a worse position than under the original lease, such as accepting a tenant with a weaker financial standing. Conversely, the landlord should not require an AGA for a tenant with equal or better covenant strength than the outgoing tenant.

Underletting

Underletting of the whole of the property is generally permitted, subject to the landlord’s consent, which should not be unreasonably withheld or delayed. Depending on the type of retail space, the tenant may also be permitted to underlet part of the property.
There will generally be conditions attached to underletting, including the requirement for the underlease to expire before the main lease ends. The underlease should also be excluded from the security of tenure provisions under the Landlord and Tenant Act 1954 ("54 Act"), and it should contain similar covenants and conditions as the headlease to maintain consistency.

Pre-emption

Landlords should consider whether they want a pre-emption clause in the lease, requiring the tenant to offer the property back to the landlord before assigning or underletting the whole of the premises. This gives the landlord greater control over future occupants, as they can choose to take the property back and enter into a direct lease with a new tenant, ensuring the landlord has a say in the type of retailer occupying the space.

Sharing occupation

Retail leases will often allow tenants to share occupation of the property with a group company, provided there is no formal landlord-tenant relationship created. This sharing will end when the group relationship ceases. In the context of the modern retail market, it may also be appropriate for tenants to have the ability to grant flexible licences to other businesses, particularly in department stores or mixed-use retail spaces. This is becoming more common in the retail sector as tenants look to diversify income streams.

For instance, you might see a coffee chain occupying space within a supermarket or a fast-food outlet sharing space in a petrol station. These arrangements are typically set out in flexible licence agreements rather than formal leases.

Charging

As rack rent leases are often seen as liabilities rather than assets, it is less common for them to be charged. However, in some cases, a landlord may permit the charging of the whole lease to a reputable commercial lender, provided consent is given, which should not be unreasonably withheld or delayed.