There are several ways ending a commercial lease early. Alienation is a legal term which refers to assignment and/or subletting (also called underletting), and parting with possession or occupation.
Mary Monson Commercial Law Solicitors can advise on assignments on commercial leases of all types. We have advised landlords and tenants on this area, and our clients include blue chip companies and small investors. We have included a free guide to this area of law below.
Alienation – Assignments and Sublets
The word alienation in law literally means ‘parting with’, so this term defines what a tenant can or cannot do and what obligations a tenant is under when leaving a property. The legal rights and obligations relating to alienation are found in both the commercial lease, and are defined by legislation, specifically The Landlord and Tenant Act 1927.
Assignment simply means transfer of the remainder of a lease’s term to a third party not in the original lease when the existing tenant wishes move out.
When ending a commercial lease early, it is important for a tenant to bear in mind that there is usually an absolute prohibition in a lease against assigning just part of a premises (e.g. one floor of a building with several floors). A landlord will normally, however, allow a subletting of a part of the property. When a tenant sublets a property, that original tenant remains fully responsible for the entire property and rent, but he then passes on those obligations to the sub-tenant (or underlessee) in respect of the part that is sublet to them.
A tenant may apply to their landlord to assign or sublet the whole property, or sublet part of it, and the lease would determine how the landlord is to treat that application. Further, the Landlord and Tenant Act 1927 may apply and imply reasonableness on the part of the landlord. A commercial lease generally focuses heavily on alienation, it being crucial not only to the landlord in terms of value of the premises and credibility of the tenant, but also to the tenant who may wish to dispose of the property.
There are numerous factors, whether explicit in the lease or implied by statute, on alienation which have to be carefully considered by a commercial solicitor.
Strategically a landlord is concerned as to the market value of his lease, and the financial credibility of the tenant. In the same way, a tenant needs to know that it can dispose of premises simply if they become surplus to its needs. An experienced commercial property lawyer will be able to guide you through the provisions that affect any form of alienation.
Consideration of ending a commercial lease early extends to disposing part of the premises and the lease’s responsibilities. What rules or obligations must be observed by a landlord when permission to do this is sought? These are usually covered in the lease. An important consideration is that there is an implied term of reasonableness. A landlord should allow a tenant to sublet where a similar quality subtenant is found.
There is, however, a provision that is found in many leases which prevents a lease being offered to a subtenant by an existing commercial lease holder at a lower rental rate than that provided for in the original lease. This is a term in most leases which preserves the landlord’s position when it comes to the rent reviews of other tenants in the development (see section on commercial leases for more on rent review). The landlord does not want other tenants using this new subtenant’s low rent being used as a lower comparable in their rent review negotiations.
For example, if a lease for a retail unit is signed at a rate of 100,000 GBP per year, and the rental market subsequently bombs so it is only worth 90,000 GBP per year the tenant might want to end or assign the lease. A well drafted lease will often say that the tenant cannot rent at less than the passing rent – this helps the landlord to influence the amount at which letting takes place in the remaining units. It unfortunately means for the tenant that it will have to make up the shortfall during the lease remainder.
Concessions and Franchising
Concessions and Franchising are usually covered in a lease in an alienation clause. Concessions may take the form of a shop within a larger shop, for example a perfume counter in a department store, and are not generally as well protected in law as a subtenancy. A franchise relates to the supply of goods or services and may or may not have any impact on property rights, as a concession may do. A tenant may want to know in advance of a lease being signed that it may bring in concessionaires or franchisees. A landlord will of course want to keep the terms restrictive, and only allow such uses where these do not harm the value of the property. The role of a commercial property lawyer is to be alive to the motivations of the client, whether landlord or new tenant, and negotiate a lease which is as marketable as possible.
The questions a landlord’s commercial lawyer should be aware of when a new tenant is being considered and a lease being negotiated are relatively common sense ones. Can the tenant afford the rent and service charge? Will they keep the properties in good repair? Will the way in which the new business operates prohibit retail? The last of these is an important consideration. The landlord has to look at the marketability of all of the units in a development, and keeping his existing tenants’ experiences profitable in as much as he or she can.
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