Licence to Assign and Underlet — SQE1 FLK2 Property Law and Practice

Contracts are exchanged for the assignment of a boutique's lease, conditional on the landlord's licence. Everything is agreed in correspondence. The landlord's costs are paid. But its only authorised signatory is abroad until the middle of next week, and the buyer has staff arriving on Friday. The seller's director asks the obvious question. Can they complete on Friday and let the licence catch up?

No. And the reason is worth the whole episode. Completing first is a breach of the lease, it exposes the lease to forfeiture, and it costs the outgoing tenant a statutory release it can never get back. This is Licence to Assign and Underlet. Keep that Friday in mind.

Here is the route. What a licence is, and why the landlord wants one. Then the question that decides everything: is the covenant absolute or qualified? Then the 1988 Act, and what a landlord must do once a written application lands. Then privity, release, and guarantees. Then what goes in the licence. Then underletting. And last, timing, and what Friday would have cost.

Start with what the document is. A licence to assign or underlet is the landlord's consent, in documentary form. It is a contract between landlord, tenant and usually the incoming party, and it is where the conditions of consent live. Consent and conditions are one package. That is why it runs to several pages instead of one word.

Why does the landlord care? Because it is choosing who occupies its building for the rest of the term. It wants rent that will be paid, a tenant that will look after the property, a use that preserves value, and covenants that will actually be performed. The licence is the moment it gets to look.

Now the question that decides everything else, and candidates skip it. What does the alienation clause actually say? There are three kinds.

Absolute. The tenant shall not underlet the whole. That is a prohibition. The tenant has no right to do it at all, the landlord need not entertain a request, and no question of reasonableness arises. Only a variation of the lease can help.

Qualified. Not without the landlord's consent. And fully qualified: not without consent, such consent not to be unreasonably withheld. The distinction between those two hardly matters in practice, because s.19(1) of the Landlord and Tenant Act 1927 implies the reasonableness proviso into a qualified covenant anyway.

And clauses split. A lease can permit underletting of part with consent not unreasonably withheld, and prohibit underletting of the whole outright. Two limbs, two regimes, in one sentence. Read them separately.

Where the covenant is qualified, the Landlord and Tenant Act 1988 does the heavy lifting. On a written application for consent, the landlord must within a reasonable time give consent, unless it is reasonable not to. It must also serve written notice of its decision, giving reasons for any refusal.

Three things follow. First, the burden is on the landlord to prove a refusal was reasonable. Not on the tenant to prove it was not. Second, breach of the duty is actionable in damages. Third, and this catches people out, there is no deemed consent.

Five weeks of silence. No reply, no request for anything further, and a buyer ready to complete. Can the tenant simply go ahead?

No. Silence may well put the landlord in breach, but it does not authorise the assignment. Assign without the consent the lease requires and you have a breach of covenant, a forfeiture risk, and something worse that we come back to at the end. The route is to press for a decision and, if none comes, to seek a declaration.

And notice what starts the clock. A written application. Telephone calls, however persistent, and raising it at site meetings, however often, engage nothing at all. Serve the written application with the supporting information at the outset, or the months before it simply do not count.

What makes a refusal reasonable? The purpose of the covenant is to protect the landlord from having its premises used or occupied in an undesirable way, or by an undesirable tenant. International Drilling Fluids is the leading case. So a buyer that plainly cannot meet the rent and the covenants is the clearest reasonable ground there is.

A company a year old, no accounts filed, valued at a fraction of a £70,000 rent, offering no deposit and no guarantor, with eleven years still to run. The landlord may refuse. One sound reason is enough. It need not multiply its grounds.

Use is a ground too. In Ashworth Frazer the House of Lords held that a landlord may reasonably refuse on this ground. The test is whether a reasonable landlord could believe the buyer intends to use the premises in breach of the user covenant. And the House rejected the obvious comeback. That the landlord could sue for the breach afterwards is no reason to make it wait for one.

Money next, and a trap. The landlord may recover a reasonable sum for the legal and other expenses of dealing with the application. That is s.19(1)(a) of the Landlord and Tenant Act 1927, and most leases say it too. What it may not do, unless the lease expressly provides, is charge a price for the consent itself.

Section 144 of the Law of Property Act 1925 supplies a proviso to a covenant against assigning without consent. No fine, or sum in the nature of a fine, is payable for the consent. So a £950 costs contribution, yes. A £3,000 consent fee, no. And demanding it would itself be an unreasonable withholding.

The same idea reaches costs undertakings. A landlord may ask for a reasonable undertaking before it starts work. What it may not do is refuse to progress the application until the tenant submits to a demand far beyond what the work is worth. The courts have held that stalling in that way is itself an unreasonable withholding of consent.

Who drafts it? The landlord's solicitor, because the consent and its conditions are the landlord's to give. The tenant is usually paying for that drafting, and it still does not shift. The tenant's solicitor has the other job: to test whether each condition is one the landlord may reasonably impose.

Now privity, and the single most important date in the topic. 1 January 1996. For a lease granted before it, the original tenant contracted to perform the covenants for the whole term, and assigning does not end that. Thursby v Plant. Privity of contract keeps it bound for the rest of the term.

And bound for breaches by assignees it has never met and never chose. Nothing in the general law ends it. Only an express release by the landlord will, and the landlord need not give one. In practice a release is bought, with money, or with security the landlord values more.

Two mitigations do reach old leases. A fixed charge such as rent cannot be recovered from a former tenant unless the landlord serves the prescribed notice within six months of it falling due. And a former tenant who pays may call for an overriding lease.

For a lease granted on or after 1 January 1996, the Landlord and Tenant (Covenants) Act 1995 changed it. On a lawful assignment of the whole, the tenant is released from the tenant covenants. Section 5. And here is the part people get wrong. That release is automatic. It requires nothing from anyone.

So is an authorised guarantee agreement compulsory? No. The statute does not oblige the tenant to give one. It is a condition the landlord may impose under s.16 where it is reasonable to do so. For a new commercial lease, the lease itself can provide for it under s.19(1A) of the 1927 Act.

And its reach is narrow. It guarantees the immediate buyer only, and only while the lease is vested in that buyer. Section 16(4). Whether requiring one is reasonable turns on the facts. Against a buyer with strong accounts, a landlord may find it hard to insist.

Then the guarantor question, and it is a favourite. A company assigns, and its parent guaranteed the original lease. The landlord's draft wants the parent to guarantee the buyer for the rest of the term. Is that something the landlord can require?

No. On a lawful assignment the tenant is released, and its guarantor is released to the same extent. Section 24(2). And s.25 makes void any agreement to the extent that it would frustrate that release. A direct guarantee of the incoming tenant is exactly that, however freely negotiated. Good Harvest Partnership v Centaur Services.

What the parent can lawfully be asked for is a sub-guarantee. A guarantee of its own subsidiary's obligations under the authorised guarantee agreement that subsidiary is giving. That backs the released tenant's own residual liability rather than the new tenant, so it frustrates nothing the Act provides.

What actually goes in the licence? The consent itself. Conditions: a guarantee where one can lawfully be required, a rent deposit, confirmation that there are no unremedied breaches. Direct covenants from the incoming tenant to the landlord to observe and perform the lease covenants. And execution as a deed by all parties.

Why direct covenants, when the lease binds the buyer anyway on the assignment? Because they give the landlord a second claim, under the licence, on terms the landlord chose, which does not depend on the lease. And nobody is bound by a covenant in a deed it has not executed, which is why all three parties sign.

The confirmation about breaches does quiet work. It fixes the state of the lease at the moment consent is given, so the buyer cannot later say it took the lease unaware. Find an unconsented alteration and the answer is not to strike the clause out. It is to identify it and deal with it.

Underletting now, and the first thing to understand is what it does not do. It does not release you. An underlease is a new and shorter estate carved out of your lease. You stay the landlord's tenant, liable on every covenant including the rent, whether the undertenant pays or not. And you become the undertenant's landlord as well.

Which brings the classic trap. Eight years left to run. The director wants the underlease drawn for the full eight years, so that nothing is wasted. Can it be?

No. An underlease must leave you a reversion, however short. Grant one for the whole residue and you have granted away everything, so it takes effect as an assignment. Milmo v Carreras. One day is enough. And it would be an assignment made under a consent given only to an underletting, so a breach as well.

Look up the chain, too. If your own landlord holds under a longer lease that forbids underletting without the freeholder's consent, its consent to you does not help. Its breach lets the freeholder forfeit the superior lease, and forfeiture destroys everything derived from it, including the underlease you have just granted.

And where the clause imposes preconditions, they must be met in substance. In Allied Dunbar Assurance v Homebase, the proposed underlease reserved the required rent on its face, while a side deed between tenant and undertenant quietly undid it. The Court of Appeal held the landlord could refuse. You cannot dress up compliance.

One more standard condition. A landlord may reasonably require the underlease to be contracted out of the security of tenure provisions before it is granted. Those are in Part 2 of the Landlord and Tenant Act 1954. Otherwise the undertenant could hold over and claim a renewal from a landlord that never chose it.

Which brings us back to Friday. The licence must be granted before the assignment completes. Correspondence agreeing terms is almost always subject to licence, and agreement in substance is not consent.

Complete first and there are two costs. The lease is exposed to forfeiture, and a breach of an alienation covenant is treated as incapable of remedy. And under s.11 of the Landlord and Tenant (Covenants) Act 1995 an assignment in breach of covenant is an excluded assignment. The outgoing tenant gets no statutory release at all.

It stays bound until the next lawful assignment, in place of the limited guarantee exposure it had carefully negotiated. All to save a few days.

A word on how this is tested. SQE1 will not ask you to recall a case name or a section number. You get a scenario, five answers, and one instruction: pick the best. So learn what the provisions do. The names are pegs to hang them on.

If you keep only three. The Landlord and Tenant Act 1988, because it turns a vague duty into a timetable with the burden on the landlord. Sections 5 and 16 of the 1995 Act, because the release is automatic and the guarantee is optional. And Milmo v Carreras, because one day short is the difference between an underlease and an assignment.

Four traps. One: the clock starts with a written application. Phone calls and site meetings, however many, engage nothing. A tenant that spends four months chasing informally and then serves the application has four months it cannot complain about.

Two: a pre-1996 lease is a different world. The original tenant is bound for the whole term, for breaches by assignees it never chose, and only the landlord can release it. Check the date of grant before you tell anyone that assigning gives them a clean break.

Three: underletting keeps you in the chain. You remain directly liable for the rent whether or not the undertenant pays, and you take on the job of managing them. It is the route when assignment is not available, not the easier option.

Four: a licence works inside the lease and never enlarges it. It cannot authorise what the lease prohibits. If the covenant is absolute, no licence granted under it will do. Only a variation will.

Quick check. A lease of a retail unit says the tenant may underlet part with the landlord's consent, such consent not to be unreasonably withheld. It also says the tenant shall not underlet the whole. The tenant has stopped trading and wants to underlet the entire unit to a single business. The landlord refuses and gives no reasons. The tenant points out that the landlord consented to an underletting of half the unit two years ago.

Three candidate answers. One: no, because the landlord must give written reasons for refusing any application of this kind. Two: no, because the strength of the proposed undertenant makes the refusal unreasonable. Three: yes, because underletting the whole is prohibited outright, so no question of reasonableness arises. Pause here if you want a moment.

The answer is three. The clause has two limbs and they are different kinds. Underletting part is qualified: permitted with consent, which cannot be unreasonably withheld. Underletting the whole is absolute. It is simply prohibited, and where a covenant is absolute the tenant has no right to do the thing at all.

So neither statute is engaged. Section 19(1) of the Landlord and Tenant Act 1927 implies the reasonableness proviso only into qualified covenants. And the duties in the 1988 Act arise only on an application under such a covenant. The landlord may refuse for any reason or none. And the earlier consent was given under the other limb, so it commits the landlord to nothing.

Five things to take away. One: read the alienation clause first. Absolute, qualified, or fully qualified decides whether reasonableness is even in play. Two: on a written application under a qualified covenant, the Landlord and Tenant Act 1988 gives the tenant a reasonable time, written reasons, and the burden on the landlord.

Three: for a lease granted on or after 1 January 1996 the release on a lawful assignment is automatic. An authorised guarantee agreement is what the landlord may require if reasonable, not what the statute demands. Four: an underlease for the whole residue is an assignment. Five: get the licence before you complete, or the release you were counting on never arrives. Next time, Leasehold Covenants.

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