What Happens When Your Tenant Applies to Assign Their Lease?
In the Healthcare sector, we are currently seeing a high volume of pharmacy tenants approaching our GP clients and asking to transfer their rights and obligations under their pharmacy lease to another party.
It is important for GPs to be aware of their obligations and the potential risks when responding to these applications.
When a tenant transfers their rights and obligations under their lease to another party, this is known as assigning a lease. When a lease is assigned, the lease will remain in place on the same terms but the tenant under the lease will change. In most cases, the landlord's consent is required to validly assign the lease and you may be unsure how to proceed.
It is very important to seek legal advice if you receive an application from a tenant to assign their lease. In most cases, the tenant will be responsible for any fees incurred by the landlord in connection with the tenant's application for consent to the proposed lease assignment.
Initial Steps
A tenant will need to make a formal application in writing for consent to assign the lease. You should be careful not to inadvertently grant consent, or even share any intention or likelihood of consent until you are certain that is how you would like to proceed. Confirming agreement in principle to the assignment (even if subject to conditions) will bind you to giving consent if those conditions are met by the existing tenant and the incoming tenant (as applicable) and so you will not be able to later change your mind or request further conditions. Your solicitor can support you in responding without granting consent.
Act Quickly
It is crucial to contact your solicitor as quickly as you can upon receiving a request to assign the lease. Although your consent is required, landlords cannot unreasonably withhold or delay consent. Failure to act quickly could allow the tenant to argue that you have unreasonably delayed consent, and they may be able to proceed with the assignment on that basis without further reference to you.
Considering the Tenant's Application to Assign Their Lease
Your assessment of the application to assign should be based upon whether you reasonably expect the incoming tenant to be able to service the tenant's obligations under the lease (which will generally include matters such as the payment of rent and keeping the property in repair). Factors such as the proposed assignee's financial stability, reputation and experience could be useful to consider.
You should obtain accounts and other financial information for the incoming tenant so that you can undertake a review of their financial position with the support of your accountants or other financial advisors.
Protecting Your Position
Investigations into the financial stability of the incoming tenant could indicate a risk that they will be unable to fulfil the lease obligations. Often assignments are being proposed where the incoming tenant will be a new company or of lower overall financial value than the existing tenant. In these circumstances, there are additional security measures which can be reasonably requested of the existing tenant or the incoming tenant:
- Authorised Guarantee Agreement (AGA): this is an agreement (usually required by the lease terms) whereby the current tenant will guarantee the incoming tenant's performance of the tenant obligations under the lease for the remainder of the lease term or until the next assignment of the lease, whichever is earlier.
- Rent deposit: a rent deposit involves the incoming tenant providing the landlord with a sum of money up front to act as security, and provide a financial buffer, in case of a potential default or non-payment of rent. The rent deposit is usually returned to the tenant at the end of tenancy, but there are circumstances in which the landlord may use the deposit to cover the costs, for example where the property has been left in disrepair.
- Personal Guarantee: when assigning to a company, a company director of major shareholder of the incoming tenant may give a personal guarantee to support the incoming tenant's performance of the lease obligations.
- Corporate Guarantee: If the incoming tenant is part of a larger corporate structure, the landlord can request a guarantee from the parent company (who is likely to be financially stronger) to fulfil the lease obligations in the event of a default by the incoming tenant.
A personal or a corporate guarantee will guarantee the incoming tenant's performance of their obligations under the lease for the remainder of the lease term or until the next assignment of the lease, whichever is earlier.
We can advise on the which of the above forms of security may be appropriate on a case by case basis. This assessment is based on considerations of the commercial and financial information provided by the incoming tenant.
The actual wording of your lease will determine how the lease assignment can be handled. Our specialist advisors in our Healthcare sector are experienced in guiding landlords through the complexities when considering a tenant's application to assign their lease.