Assignment / Subletting / Use Clauses
Transfer of the Lease by Tenant
“Assignment” is the process whereby a tenant transfers his interest in the property to another tenant and is usually thereby released from the lease obligations. If the lease says nothing, the tenant is free to assign. Most leases, therefore, contain restrictions on assignment.
Nearly all leases of more than 5 years, allow for the tenant’s right to assign, subject to the landlord’s consent, which is not to be unreasonably withheld. There will usually be an absolute prohibition on dealing with part of the property (e.g. selling part). The Landlord and Tenant Act provides that notwithstanding anything to the contrary in the lease, where there is a restriction in a lease in relation to assignment, sub-letting, charging or parting of possession without landlord’s consent, then such consent must not be unreasonably withheld.
What is “reasonable” will depend on the entire circumstances. A tenant can apply to the court for a declaration that the landlord is acting unreasonably. Where the above provisions apply, it will be a matter for the court to decide what is or is not reasonable. The courts have said that the Landlord is only entitled to refuse consent for reasons that are based on the relationship of landlord and tenant. The court will not interfere if the conclusions which were reached, might be reached by a reasonable landlord. The landlord need not prove his conclusions were in fact justified.
The landlord is entitled to consider the application on the basis of its own interests. There may be cases where there is such disproportion between the benefit of the landlord and the detriment to the tenant, that the refusal could be deemed unreasonable.
Generally, a landlord is not entitled to insist on a tenant of equal strength to the assigning tenant. If the outgoing tenant is able to show that the incoming tenant has sufficient resources and ability to cover the lease obligations (perhaps by offering a guarantee where necessary) he will generally be entitled to consent to the assignment of the lease. Other considerations which may justify refusal of consent include existing breaches of the leases, the possibility that the assignee might compete with the landlord’s other tenants and the possible devaluation of the landlord’s interest.
Sub-Leases by the Tenant
A sub-lease is a lease made by a tenant in favour of another tenant, usually referred to as a sub-tenant. Landlord’s consent will usually be required for the sub-lease, under the terms of the lease. It is vital from the investor’s point of view that the sub-lease does not undermine the value of the investment. Applications for consent to a sub-lease should be considered very carefully. A sub-tenant can itself obtain statutory rights of renewal and compensation so that it is vital that appropriate provisions are made in the consent “licence” document.
A sub-lease can be of all or part of the leased property. With a sub-lease, there will not usually be a direct relationship between the head landlord (i.e. the landlord under the original lease) and the sub-tenant. However, the terms of the consent for the grant of the sub-lease may change this position, so that the sub-tenant undertakes directly with the head landlord to comply with the terms of the sub-lease and/or the head lease insofar as they affect the property concerned.
In the case of a sub-lease, the original tenant is fully “on the hook” for the rent and all other obligations. The tenant has rights and obligations under the sub-lease as against the sub-tenant and the tenant remains fully liable on his lease covenants to the landlord (unlike in the case of an assignment).
Leases will often set out in detail, mandatory provisions which must be contained in a sub-lease. A well-drafted lease will specify in detail the types of conditions that must be imposed by a tenant in a sub-lease, (provided the landlord’s consent is forthcoming).
It is important for the landlord to ensure that consent is not given for a sub-lease which would undermine the investment. Therefore, the sub-lease should be at market value and with no premium. It is essential that the sub-lease covenants comply with the main lease covenants. It is often provided that the rent reviews take place in tandem with the head lease rent review. Some leases provide that the sub-lease rent cannot be less than the lease rent.
Use
Leases will normally restrict the permitted use of the property. This will be particularly important in the case of a shopping centre or shopping arcade where there is a mix of different uses planning law will limit what a property may be used for and a breach has legal consequences. The landlord will also want to maintain the value of the property by avoiding damage to its reputation by undesirable uses.
The permitted use under a lease will usually be relevant to the rent review because the rent will be reviewed on the basis of the terms of the existing lease. Therefore, a narrow permitted use clause may reduce the market rent on future rent reviews, because it narrows the categories of potential lessees.
It is a matter for agreement between the landlord and tenant on the grant of the lease, as to how broadly or narrowly the use is defined. At the minimum, the possible uses will be limited or as provided by the Planning Permission. There will usually also be restrictions on the tenant applying for Planning Permission to change in the use without consent.
Uses can be defined very broadly or narrowly. A use could be specified as offices, retail, industrial etc. These would be quite open. Other uses could be specific to particular types of business e.g. (estate agency, shoe shop etc.)
The Landlord and Tenant Act provides that a term in a lease prohibiting change of the use is deemed to be modified so that it is deemed to be subject to landlord’s consent, not to be unreasonably withheld. Most longer leases specifically provide, that use may be changed with the landlord’s consent, such consent not to be “unreasonably” withheld or delayed. If the landlord refuses to consent, the tenant can apply for a Court Declaration that the landlord’s withholding of consent is unreasonable.
There are usually additional obligations requiring the tenant to comply with Planning legislation. Sometimes leases provide that the tenant must use the premises for a particular purpose i.e. that the tenant must trade. This would be common in shopping centres. In these circumstances, the tenant could not stop trading at the property without breaching the lease. The tenant would usually resist such a covenant.
Alterations and Works
Leases usually restrict the tenant’s ability to undertake works to the property. This is in order to protect the landlord’s interest in his property. Over and above the lease, there are restrictions and conditions arising from Planning Legislation, Building Regulations, superior titles and common law obligations which may be relevant to proposed building works. See our last chapter in relation to improvement notices and compensation.
The landlord will want to ensure that alterations comply with legislation in order to ensure that the property is not substantially different to that originally let and to maintain the character, appearance and reputation of its building, its rental value and the value of any adjoining premises of the landlord.
In the case of short term lettings, the landlord will want to exercise very tight control. In the case of longer lettings, a lease would not be attractive to a tenant if there was severe restrictions on the ability to make alternations.
The Landlord and Tenant Act implies a condition into a lease, that that landlord’s consent is not to be unreasonably withheld to works which are an “improvement” . What is or is not an “improvement” is looked at from the tenant’s perspective. The landlord will only be deemed to act reasonably where his reason for refusal relates to the relationship of landlord and tenant and the property. If, in the tenant’s opinion, the landlord is unreasonably withholding consent to an improvement, the tenant may seek a court declaration that the landlord is acting unreasonably.