Licence to assign: new lease with AGA and guarantee | Practical Law
Licence to assign: new lease with AGA and guarantee
Practical law uk standard document w-013-1799 (approx. 49 pages).
- Practical Law
Licence to assign
Practical law uk standard document 0-506-0569 (approx. 19 pages).
- Assignments, Variations, Surrenders and Termination - Land and Buildings
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Licence to Assign – what exactly is it and why do some leasehold properties require one?
What is a Licence to Assign?
Some leases, but by no means all, contain a provision that require an outgoing tenant (the Assignor) to obtain their landlord’s/freeholder’s consent to them selling their lease. This Licence to Assign is the consent document to assign the lease/flat to a new incoming tenant (the Assignee). It should be noted that the consent can have conditions attached for the Assignor and the Assignee and that it does not have to be by way of a formal deed.
When do you need a Licence Assign?
The tenant will need this Licence any time it wishes to assign the lease. By ‘assign’ this means sell or transfer a property. For example, even if the person just wants to transfer from their sole name into joint names or from a company name to individual director or shareholder names, this would trigger the requirement for a Licence to Assign under the lease.
Why do you need a Licence to Assign?
Many sellers view the Licence to Assign requirement adversely and just as an additional expense. Assignee’s can also view them in a negative light, particularly if they are asked to pay a deposit (See ‘conditions’ attached to Licence below). However, the reality is that these licences can be viewed as good practice and management by the landlord of a building. They are essentially vetting and approving the incoming owners of the flats in the building and want ensure they are of a suitable character and a certain calibre so as to (hopefully) avoid issues with non-payment of charges for the building (which can lead to expensive litigation and is ultimately payable by the other flat owners); and nuisances which can arise between neighbours etc. (the cost of abating the same is also to be borne by the other flat owners).
Who prepares the Licence to Assign?
This consent is almost always prepared by the Landlord’s solicitor or managing agent who will charge professional fees for producing the draft Licence, which is a pre-condition of the Licence being drafted and provided. The fees will need to be paid by either the Assignor or Assignee, but usual practice means it falls upon the Assignor, i.e. the seller of a flat.
What are the ‘conditions’ attached to the Licence to Assign?
Besides payment of the Landlord’s professional fees (which range to between £750 to £2,000 plus VAT), the Assignee will be asked sometimes to provide references (usually character, professional and financial) if they are individuals to prove that they are reliable and trustworthy and can afford the annual outgoings on the property. Furthermore, non-UK residents and corporate entities, such as companies and trusts, may be asked to pay x2 or x3 years’ service charge and ground rent up front and to enter into an additional deed known as a ‘Rent Deposit Deed’ or ‘Maintenance/Service Charge Deposit Deed’, which is a form of guarantee for the Landlord.
How long does a Licence to Assign take?
This really depends on how fast and responsive the Landlord’s solicitor or managing agent is in a) providing the conditions and then b) getting the Licence signed by the Landlord. Equally, the Assignee would need to satisfy the conditions (i.e. obtain references or agree the deposit deed) and sign up. Typically, a Licence can be completed within 3-4 weeks, but this can be shorter if the parties are motivated and proactive and quick to liaise with one another to deal with the conditions and sign up, however it can also take longer if the parties involved are slow. By parties, this is not just in reference to Assignor and Assignee, but also third parties such as banks providing financial reference or employers providing professional references for the Assignee.
Furthermore, the professional fees are usually required to be paid “whether or not the matter proceeds to completion” meaning that the fee is payable whether or not the assignment proceeds and even if it becomes abortive, the whole fee is payable. Sometimes, then, the party paying the fees will want to have some certainty that the assignment transaction (to that particular party /entity) is going to proceed before it will submit the request for consent, which can delay things also.
Can consent be refused?
The request for consent by the Assignor to the Landlord is usually qualified by stating that the Landlord cannot withhold or delay their consent unreasonably. The Landlord and Tenant Act 1988 also requires Landlords give consent within a reasonable time (except where it is unreasonable to do so).
What is ‘reasonable’ was considered in the case No. 1 West India Quay (Residential) Ltd vs East Tower Apartments Ltd, 2018 . The Landlord was No.1 West India Quay, and the Tenant was East Tower Apartments.
The Tenant had 42 apartments on underleases, which it was selling, with the (superior) Landlord’s consent required for these to be sold.
The Landlord in this case imposed three conditions upon its consent:
- That bank references be provided for the proposed assignee
- That the property be inspected by a surveyor, with the Tenant to cover the costs (£350 + VAT per property)
- That the Tenant covered the Landlord’s legal costs of £1,250 + VAT per property.
The Tenant started proceedings against the Landlord, claiming these conditions were unreasonable and that consent had therefore been unreasonably withheld.
The courts in the first instance found all three conditions to be unreasonable. However, on appeal, the High Court found only condition 3 was unreasonable. Yet they decided that that this single unreasonable condition made the Landlord’s overall refusal of consent unreasonable, even though the other two conditions were reasonable conditions.
Finally, the Court of Appeal concluded that Landlord’s decision to refuse consent was reasonable. The fact one of the conditions was bad, did not outweigh the two good conditions in the overall context.
The case highlighted the difficulties facing Landlords, but showed a rational approach from the courts, whereby when multiple reasons are given for withheld consent, the overall decision will be considered, even where some individual reasons may be invalid.
14 March 2022
Partner, Commercial Property Law
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Q&A: I want to assign my lease. What do I need to consider?
Assigning your lease is a way to dispose of your legal interest in the lease by transferring it to a third party. The incoming tenant will “step into the shoes” of the outgoing tenant and take on the tenant obligations under the lease. If you would like to assign your lease, you will need to consider the following:
1. Does your lease permit assignments?
Check the alienation clause in your lease. Generally a lease will permit assignments of the whole of the property with the landlord’s consent which is not to be unreasonably withheld or delayed.
2. Finding an assignee
You will be responsible for finding the new tenant to assign the lease to and negotiating the terms of the assignment, i.e. any premium payable. You may wish to use an agent to market the property.
3. Applying for consent
If the landlord’s consent is required, you will need to apply to the landlord for consent to the assignment and the lease will likely require you to pay the landlord’s costs in connection with this. If the landlord does provide their consent, it will usually be in a formal licence to assign document and we can assist with the negotiation of this.
4. Can the landlord withhold consent to the assignment?
The lease will likely set out circumstances when it will be considered reasonable for the landlord to withhold its consent to the assignment. These commonly include:
- Sums due under the lease not being paid to date. The landlord will likely require all outstanding payments to be made before they give their consent to the assignment; or
- The new tenant not being of sufficient financial covenant strength. The wording of the lease may vary but the landlord may require evidence of the new tenant’s financial covenant strength (i.e. copies of company accounts).
The landlord may also be able to withhold consent in other circumstances provided it is acting reasonably.
5. Can the landlord impose conditions on the assignment?
The lease will likely also set out conditions that the landlord can impose when granting consent to the assignment. These may be requirements for the new tenant to satisfy, such as providing a rent deposit or a guarantor.
It is also common for the landlord to require an authorised guarantee agreement (AGA) from you when assigning your lease. This is a guarantee from you of the new tenant’s performance of the tenant obligations under the lease. This means that you will still be “on the hook” even after assigning the lease. For example, if the new tenant fails to pay the rent under the lease, the landlord can pursue you for the outstanding sum. However, any AGA you give will fall away if the new tenant you assigned the lease to assigns the lease again, and there may be some circumstances when it is unreasonable for the landlord to require an AGA from you (i.e. the new tenant has a superior covenant strength).
6. Other practical considerations
- If you provided a rent deposit to your landlord, this will likely be repayable on the assignment of the lease. You should request confirmation of the amount that is held and how and when this will be returned to you.
- You will likely need to give notice of the assignment to the landlord. There is usually a notice fee that accompanies this of around £50-£100.
- The new tenant will usually deal with registering the assignment with HM Land Registry if applicable, but you should request a copy of the title as evidence that this has been completed.
We can assist with assigning your lease, including obtaining the landlord’s consent. We can also assist with any disputes in relation to consent being withheld or conditions imposed on the assignment.
Contact our experts for further advice
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A licence to assign a lease of commercial property which is a "new" lease for the purposes of the Landlord and Tenant (Covenants) Act 1995.
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