Assignment of Leases — SQE1 FLK2 Property Law and Practice

A company holds a lease of an industrial unit. It found a buyer, applied for the landlord's consent, and waited. The landlord asked for another set of accounts. Six weeks in, the company lost patience, executed the deed of assignment and completed. The buyer is in occupation. So has the company got rid of the lease? The lease, yes. The liability, no.

It has done the one thing that gives away the estate and keeps the obligations. This is Assignment of Leases, and it is a topic where the law is mostly in one statute and the marks are mostly in the detail. Two questions run through all of it. What does the landlord control, and who stays on the hook afterwards. Keep our impatient company in mind.

Here is the route. What assignment actually is, and how it differs from underletting. Then the due diligence, and the enquiries. Then consent, which is where the arguments happen. Then what goes wrong if you assign without it. Then the deed itself. And then the release scheme, the guarantee the landlord can demand, and the protections a former tenant keeps.

Start with what assignment does. It transfers the whole of the tenant's remaining estate, so the assignee steps into the tenant's shoes and becomes the landlord's tenant for the rest of the term. Underletting carves a new and shorter estate out of the lease, so the original tenant keeps its own lease and becomes a landlord itself.

So a tenant who wants a clean break assigns. A tenant who wants to come back later underlets. And here is a trap. You cannot underlet for the whole of the residue. An attempt to do so operates as an assignment, whatever the parties called it. That is Milmo v Carreras.

Now the due diligence, and the first rule is that a summary is not a lease. The assignee takes the lease exactly as it stands and is bound by its covenants from completion, so you read the whole lease, every variation and every side letter.

Four things to establish. What the alienation clause requires. The service charge position, including arrears and major works in prospect. The rent position, verified with the landlord rather than taken on the seller's word. And whether the lease is contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954.

On enquiries, be clear who answers what. Pre-contract enquiries are raised of the seller, because the seller knows how the lease has actually been operated. The Commercial Property Standard Enquiries are the standard set. CPSE.1 is the general form, and CPSE.4 the supplemental form for the assignment of a lease. Do not reach for CPSE.2, which is for a property sold subject to commercial tenancies.

Their scope is deliberately wide, and replies are relied on and commonly warranted, so an inaccurate one can found a claim in misrepresentation.

Enquiries of the landlord or its managing agent are raised in addition, not instead, and cover what only the landlord can confirm. Whether rent and service charge are up to date. The service charge accounts and major works. Alleged breaches, notices served, and the consents it will want.

Now consent, and everything turns on how the alienation clause is drafted. An absolute covenant prohibits assignment outright. A qualified covenant permits it with the landlord's consent. Where the covenant is qualified, s.19(1) of the Landlord and Tenant Act 1927 implies a proviso. Consent is not to be unreasonably withheld, even if the clause never says so.

Read that limit carefully. The proviso goes into qualified covenants only. Faced with a clause that simply says the tenant shall not assign, full stop, the landlord may refuse for any reason or none. However impeccable the buyer. And the statutory duties do not bite either.

And a single clause can be both. Assignment of part prohibited outright, assignment of the whole permitted with consent not to be unreasonably withheld. Read the sentence that matches what your client wants to do.

Where the covenant is qualified, the Landlord and Tenant Act 1988 adds procedure with teeth. On a written application the landlord must, within a reasonable time, give consent unless it is reasonable not to. It must serve written notice of its decision, with reasons for any refusal or condition. And the burden of proving that a refusal, a condition, or the time taken was reasonable rests on the landlord.

So a landlord that sits on an application for eleven weeks, refuses by telephone and gives no reasons is in breach on every limb. Breach of the duty is actionable as a breach of statutory duty, and damages can be substantial where a sale is lost.

What counts as reasonable? The covenant exists to protect the landlord from undesirable occupation or an undesirable assignee. So the assignee's financial weakness, an intended use that would breach the lease, or proposed alterations needing consent are all capable of being good grounds.

What is not reasonable is using the covenant to get something the lease does not give you. A landlord who refuses because rents have risen, hoping the tenant will offer a surrender so it can re-let higher, is seeking a collateral advantage. Unreasonable, however promptly it is put in writing.

On money, s.19(1)(a) of the 1927 Act preserves the landlord's right to a reasonable sum for the legal and other expenses of dealing with the application. In practice it takes an undertaking for costs first. What it cannot do is demand a flat fee unrelated to that work as the price of even considering the application.

There is one important exception, and it applies to new commercial leases. Under s.19(1A) of the 1927 Act, inserted by the Landlord and Tenant (Covenants) Act 1995, landlord and tenant may agree in advance the circumstances in which consent may be withheld. Where the landlord withholds it because an agreed circumstance exists, it is not treated as withholding unreasonably.

So a lease letting the landlord refuse unless the assignee's profits have been three times the passing rent in each of the three preceding years does exactly that. A refusal on that ground is lawful, however impressive the assignee otherwise looks.

Now back to our impatient company. Assigning without a consent the lease requires does not undo the assignment. A covenant against assigning is a promise by the tenant, not a restriction on its power to dispose of the estate. The term passes, completed by registration where the lease is registered. The landlord cannot go on treating the assignor as its tenant.

What the breach does is hand the landlord a remedy, and cost the tenant its release. The landlord can claim damages and forfeit, after a notice under s.146 of the Law of Property Act 1925, subject to the assignee's right to apply for relief. And it must move quickly, because demanding the next quarter's rent with knowledge of the breach waives the right to forfeit.

The worse consequence is for the assignor. An assignment in breach of covenant is an excluded assignment under s.11 of the 1995 Act, so the statutory release simply never operates. Our company remains bound by the tenant covenants alongside its buyer, and is released only on the next assignment that is not excluded. It gave away the estate and kept the obligations.

The deed itself must be executed as a deed, and by both parties. The buyer gives an indemnity covenant in it, and nobody is bound by a covenant in a deed it has not executed. An individual executes by signing in the presence of a witness who attests the signature. A colleague who watches and signs nothing has attested nothing.

Two protections for the buyer sit in the deed. First, covenants for title, implied by the Law of Property (Miscellaneous Provisions) Act 1994 where the deed is expressed to be made with full or limited title guarantee. These are the seller's promises, not the landlord's.

With full title guarantee the seller covenants that it has the right to dispose of the interest. It covenants too that the property is free from incumbrances, other than those it neither knows of nor could reasonably be expected to know of. And on a disposition of leasehold land, s.4 adds a covenant, under either guarantee, that the lease is subsisting and free of any subsisting breach making it liable to forfeiture.

That is the buyer's answer to the undisclosed mezzanine floor put in years ago without consent. Second, an express indemnity for breaches committed before completion, taken expressly because the old implied indemnity covenants were repealed for new tenancies by the 1995 Act.

And note what it is for. An assignee is not personally liable for a breach that occurred before it took the lease. But forfeiture is a remedy against the lease. So a buyer facing forfeiture for the seller's old arrears will pay them to save its own estate, and then claim under the indemnity.

Now the release scheme, the heart of the topic, and it turns on one date. 1 January 1996. A lease granted on or after it is a new tenancy. A lease granted before it is an old tenancy, and the two are governed quite differently.

Under an old tenancy, privity of contract keeps the original tenant liable on the tenant covenants for the whole term, even after assigning and after several further assignments. That is the harshness the 1995 Act was passed to end. There is no release to buy off, so there is no authorised guarantee agreement either. The machinery simply does not exist.

Under a new tenancy, s.5 of the 1995 Act releases the tenant from the tenant covenants on a lawful assignment of the whole. Automatically. But the landlord may exact a price, and s.16 is that price. It can require an authorised guarantee agreement where it is reasonable to do so, or where the lease provides for it under the s.19(1A) machinery.

Get the direction right, because it is the commonest misunderstanding in the topic. The guarantee is given by the outgoing tenant, not the incoming one, and it guarantees the incoming tenant's performance. The tenant who is leaving guarantees the tenant who is arriving.

And it has two hard limits, both in s.16. It can guarantee the immediate assignee only. And it can last only while the lease is vested in that assignee.

Any drafting that tries to stretch a guarantee to every person in whom the lease may from time to time be vested is void to that extent. Section 25 strikes down anything frustrating the operation of the Act. But only to that extent: the clause survives as a guarantee of the immediate assignee.

The same anti-avoidance point catches a different trick. The outgoing tenant's own guarantor is released with the tenant it guaranteed, so a landlord cannot require that guarantor to guarantee the incoming assignee directly. What it can validly take is a sub-guarantee of the outgoing tenant's own obligations.

Three protections then cushion a former tenant. First, s.17. A former tenant, or its guarantor, is not liable for a fixed charge, meaning rent, service charge or a liquidated sum. Not unless the landlord serves a notice in the prescribed form of its intention to recover, within six months of that charge falling due.

Chase the current tenant all summer and you lose the instalments that fell due more than six months before your notice. On quarterly rent, one late notice quietly writes off a quarter.

Second, s.18. A former tenant is not liable for any amount referable to a variation of the tenant covenants made after the assignment which the landlord had an absolute right to refuse. Agree a change of use the landlord could have refused, and the rent rises, and the former tenant stays liable at the old figure.

Third, s.19. A former tenant who pays in full a fixed charge demanded by a notice may, on written request within twelve months of payment, require an overriding lease. That is a reversionary lease for the residue of the term plus three days, slotted in between the landlord and the defaulter.

Which turns the former tenant from a paymaster into a landlord. It can enforce the covenants itself and, on continuing default, forfeit the defaulter's lease and take possession or re-let.

Last, completion and afterwards. The order matters. The licence to assign, and any guarantee or rent deposit deed it requires, must be executed before the money is released. Complete first and you have bought a lease in breach of the alienation covenant, and destroyed the seller's release.

The completion statement apportions. Rent and service charge are payable in advance, so the seller has paid for a period running past completion. The buyer reimburses the part after completion, along with any premium.

The rent deposit needs dealing with expressly, because it is held under a separate deed and does not pass with the lease. Either the landlord releases the fund and takes a fresh one from the buyer, or it holds the existing fund for the buyer, who reimburses the seller. The licence records it.

Afterwards, two steps. Serve notice of assignment on the landlord in the form and time the lease requires, often one month. That is a covenant, and the licence does not discharge it. And apply to register the transfer, because for a registered leasehold title the assignment does not operate at law until the buyer is registered as proprietor.

A word on how SQE1 tests this. You will not be asked to recite section numbers, and this topic has almost no case law in it. You get a scenario and five answers. The numbers here are scaffolding for your own thinking, not something to recite.

If you keep only three things. 1 January 1996, which decides whether the release scheme applies at all. Qualified against absolute, which decides whether the landlord has to be reasonable. And the two limits on an authorised guarantee: the immediate assignee only, and only while that assignee holds the lease.

Four traps. One. An assignment in breach of covenant is still effective. The estate passes. What the tenant loses is its statutory release, because that is an excluded assignment.

Two. The reasonableness proviso is implied into qualified covenants only. An absolute bar is an absolute bar, and the strength of the buyer is neither here nor there.

Three. The guarantee runs the way people do not expect. The outgoing tenant guarantees the incoming one, not the other way round, and never the tenant after that.

Four. Do not stop at completion. Notice of assignment is a separate covenant that the licence does not discharge, and the transfer of a registered lease does not operate at law until the buyer is registered.

Quick check. A company assigned its lease of a depot five years ago with the landlord's consent, and gave an authorised guarantee agreement in respect of the assignee at the time. Last year that assignee obtained consent to assign the lease on to a third business, which is now the tenant. That business has begun to miss rent, and the landlord says it will look to the company for the arrears.

Can the landlord recover them from the company? Three answers. One: yes, because such a guarantee binds the outgoing tenant for the remainder of the term. Two: yes, because only an express written release can end it. Three: no, because the guarantee could last only while the tenant it guaranteed held the lease. Pause here if you want a moment.

The answer is three. An authorised guarantee agreement may not impose liability on the outgoing tenant after the assignee it guarantees is itself released. The second assignment was made with consent, so it was lawful, and it released the first assignee. The company's guarantee died with that release.

Why the others fail. Option one describes the old law, before 1996, where privity of contract did hold a tenant for the whole term. Option two invents a formality the statute does not require: the guarantee ends by operation of law. Change one fact and it flips. Had that second assignment been in breach of covenant, the first assignee would never have been released, and the company would still be on risk.

Five things to take away. One: assignment transfers the whole residue, and an underletting for the whole residue is an assignment whatever you call it. Two: read the alienation clause first, because qualified means the landlord must be reasonable and absolute means it need not be. Three: our impatient company kept the liability, because assigning in breach is an excluded assignment.

Four: on a new tenancy the outgoing tenant is released. The price the landlord can exact is a guarantee of the immediate assignee, lasting only while that assignee holds the lease. Five: a former tenant has three shields. The six-month notice for fixed charges, no liability for variations the landlord could have refused, and the right to call for an overriding lease. Next time, Licence to Assign and Underlet.

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