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Assignment and sub-letting of leased property

Assignment and sub-letting of leased property

Conventionally, a tenant is allowed to dispose his lease, either by sub-letting or through an outright assignment. But the landlord still has the right to exercise control over who shall be allowed to occupy the property.

Flat leases

In the case of long-term leases, the tenant has paid a huge amount of money as premium; therefore he would not want the landlord to impose too many restrictions on his freedom to dispose the lease. It is also the duty of the landlord to understand that a lease with too many restrictions would make the property unacceptable to a prospective mortgagee.

The mortgagee would naturally want to exercise substantial control when exercising its power to sell without imposing limitations. Thus, restrictions during long term leases are usually unheard of. However, there would be limitations on the assignment or sub-letting of part. Also, sometimes restrictions are imposed in the case of assignments in the final few years of the term of lease.

Even if there are no restrictions, the landlord may want to know and identify the new tenants. Thus, it is common for the landlord to place a covenant to register any dealing with the landlord and pay a small fee.

Commercial leases

It is normal for commercial leases to incorporate stricter lease terms. These are usually for a short-term and higher rent. In the case of a commercial lease, the threat of a tenant damaging the reversion of property (either by not paying the rent promptly or damaging the property) is real and hence it is very important that the identity and status of the tenant is satisfactory.

Absolute prohibition

Except in the case of short-term leases, tenants would not accept an absolute prohibition on leases. Although the landlord can be requested to waive off this covenant, he would have to still remain at the mercy of the landlord to seek consent.

Qualified prohibition

The landlord can however provide a qualified covenant wherein the tenant shall not be allowed to assign the property without the express permission of the landlord. But it also provides that the landlord shall not withhold his consent without proper reason. Such a covenant is useful to a tenant as it gives him sufficient leeway for an assignment.

As per Section 19(1) (a) of the Landlord and Tenant Act 1927, a covenant that does not allow the tenant to assign, underlet, charge or part with the property is subject to the condition that the landlord shall not withhold his consent in providing the licence to assign unreasonably. Thus, a qualified covenant can be made to operate as a fully qualified covenant by applying S19 (1) (a). Usually landlords do not act unreasonably unless they are in doubt about the prospective tenant’s status or the purpose for which the prospective tenant wishes to occupy the property.

The Landlord and Tenant Act of 1988 also aim to help a tenant seeking consent to assign, sub-let, charge, or part with the property. Accordingly, when the lease contains a qualified covenant for alienation, the landlord is expected to reply within reasonable time, unless he thinks it is reasonable to do so. Such a response should be in writing explaining if he would or would not concede to the tenant’s request for allowing alienation. He should also clearly explain the reason why he is withholding consent. The burden of proving unreasonableness lies on the landlord.

Special rules for covenants against assigning commercial leases

Section 19(1) (1A) of the Landlord and Tenant Act of 1927 provides for special regulation regarding covenants that restrict assignment of commercial leases granted on or after 1st January 1996. These provisions allow the landlord and tenant to agree in advance specifying the circumstances when the landlord may withhold his consent to an assignment and also specify the circumstances where the landlord may provide his consent.

If the landlord withholds his permission because of the existence of circumstances already provided, he is not said to be acting unreasonably. By using S 19(1) (1A), the landlord can ensure that he provides strong grounds to disallow assignment.

The provisions provided can be factual (ex. whether the assignee is a company quoted on the London Stock Exchange) or discretionary (i.e. whether the assignee is capable of carrying out the covenants in the opinion of the landlord). When the provisions involve the use of discretion, S 19(1) (1A) provides that;

a)      Discretion should be used reasonably, or

b)      The tenant is given the right to review the landlord’s right to exercise discretion by an independent third party whose identity can be ascertained by the provision. For instance, if the landlord thinks that the assignee is capable of performing the covenants, but the tenant disagrees, he can apply to an expert appointed under the terms of the lease for a second opinion.

Sub lettings

Section 19(1) (a) of the Landlord and Tenant Act of 1927 not only applies to assignments and alienation, but also to sub-letting. Sub-letting of the entire premises is allowed with the same restrictions that are applicable for assignments. But in the case of sub-lettings, the terms of the lease are stricter and often subject to absolute prohibition. A landlord who sub-lets his property to another person would not like that his property is converted into a multi-tenanted block.

Although Section 19 (1) (1A) of the above mentioned act is applicable to assignments, an effect similar to that crated by this section can be achieved by carefully drafting the alienation covenants. For instance, the tenant can be required to first offer to surrender the lease without any consideration before the assignment. This was held to be possible under S 19(1)(a) and held as a judgment in the case of Bocardo SA v S&M Hotels [1980]1 WLR 17. Sometimes, the lease may include a provision where the right of the court to decide if the landlord has acted reasonably is excluded. This is actually a matter of the court to decide and hence the position with regards to applicability of S 19(1) (a) is less certain.

Photo courtesy: Chicagogeek

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