Alienation. This strange term can often be an area of continued negotiation and is one of the most important provisions of a lease given the impacts it can have on both the landlord and tenant’s ability to exercise flexibility and control over the lease during the term. In more recent years with the global pandemic and high interest rates, we have seen the importance of alienation within commercial leases and getting it right. In this article we will explain exactly what is meant by ‘alienation’ and the importance of this when leasing a commercial property.
What is an alienation lease?
An alienation lease is a legal agreement that allows the tenant flexibility within their occupation and can permit the tenant to assign, sublet or even share occupation of the property throughout the duration of the lease term. These provisions can be invaluable for the tenant to rely upon should their position change during the tenancy. This may be as a result of needing to relocate or due to unpredicted financial circumstances.
Alienation provisions additionally need to provide the landlord with security over the lease and use of the property. It is important that alienation clauses are drafted for the landlord to retain some control over how, and to whom, the tenant grants any occupational rights to. It is crucial that alienation provisions are carefully and fully considered when negotiating the terms of a lease.
Alienation provisions in a commercial lease
Alienation provisions are clauses which can be included within a commercial lease and they set out what rights the tenant has to deal with the property should their circumstances change during the lease. Alienation provisions can include the tenant’s rights to assign, sublet, share occupation and take out a security over the property.
In addition to affording the tenant rights to deal with the property, alienation provisions also provide protection to the landlord as they stipulate conditions which the tenant must comply with should they wish to exercise their rights. Some of these key areas are discussed below.
Assignment
If a tenant no longer wishes to occupy the property but the term of the lease has not yet come to an end, the tenant may wish to assign the lease to another party. This is known as a lease assignment. Upon assignment the new tenant will effectively take on the role of the outgoing tenant by assuming responsibility of the tenant covenants under the lease namely for the rent and any other charges payable in return for the occupation of the property. The outgoing tenant’s obligations and responsibilities under the lease will essentially transfer to the new tenant known as the assignee. The option to assign a lease offers the tenant great flexibility, especially when the lease is for a longer term, as the tenant is effectively permitted to exit the lease and pass their duties and responsibilities from the lease on to a third party.
If the tenant is permitted to assign the lease, the lease will nearly always provide that the assignment is subject to the tenant obtaining the landlord’s consent. The lease can provide that landlord consent will only be given subject to the satisfaction of certain conditions being met, such as the outgoing tenant acting as a guarantor for the incoming tenant. If the landlord is not satisfied that the new tenant meets certain requirements they can refuse to grant consent. This might be the case if the new tenant cannot meet certain financial criteria or legal standing. The requirement to obtain landlord consent is to protect the landlord’s position and ensure the landlord retains control over who is occupying the premises. This is desirable as the landlord will want to ensure that any new tenant is suitable and is capable of complying with all of their obligations under the lease (including payment of rents).
The requirement for consent and the landlord’s conditions for granting this could potentially lead to disputes between the parties. For this reason it is imperative that both the landlord and tenant properly consider the right to assign and any conditions attached. Wide, ambiguous or onerous drafting of the conditions could all have significant impacts on the parties should the right to assign ever need to be exercised.
Subletting (or underletting)
If a tenant is not using all or part of their property they may decide to sublet this to a third party in exchange for a rental income. This is known as subletting (or underletting). Subletting might be seen as a practical solution for tenants who do not want to break their lease but no longer require the use of the whole or part of their property. By subletting the appropriate space to an undertenant the tenant effectively becomes the undertenant’s landlord and can receive a rental income from the subtenant. The tenant would still be responsible to the landlord for their obligations under the terms of the original lease but could pass the responsibility of some (if not all) of these obligations onto the subtenant in an underlease.
Similarly to assignment, with subletting, it is imperative that the landlord retains control of the occupation of the property and is able to ensure that they are aware of who is occupying the property and on what terms. It is for this reason that landlords will ordinarily require the tenant to obtain their consent prior to granting any underlease to a potential subtenant. The landlord’s consent, again, will likely only be given if certain conditions are met. A standard condition often attached to subletting consent is that the underlease must be in line with the terms of the original lease; this is to ensure that the subtenant does not breach any of the terms of the original lease and, if they do, the landlord can hold the tenant liable for these.
Sharing occupation
The tenant may wish to share occupation of their property with a third party, possibly by allowing the third party to desk share in an office or store equipment in a warehouse. It could be that the third party is linked to the tenant in some way such as they are both members of the same group company. Again, the flexibility to share occupation permits the tenant to utilise the property to their advantage. This kind of arrangement is informal in nature in that the sharing tenant would ordinarily have no documented right to occupy the property.
If the tenant is sharing occupation with a third party on a undocumented basis, this can be worrying for the landlord as they have no information on who is using the property and on what basis. The landlord will want to ensure that any third parties are not acquiring an interest in the property and are not breaching any of the conditions the tenant has agreed to comply with. Landlords can request that consent is sought from them prior to the tenant allowing a third party to share occupation. This consent can, again, be granted with conditions such as the third party can only be part of the same group company as the tenant. In order to protect the landlord’s interest in their property the tenant’s ability to share should always be carefully considered.
What is an alienation clause?
An alienation clause relates to any charge or debt which has been secured over the property. For example, a mortgage with a bank or lender. If the tenant has taken out a security against the leasehold interest of the property, they will not be able to sell or transfer the property to another person until such time that the debt has been paid off. The repayment of the security will release the borrower from their obligations to the lender and will ensure that the property is transferred to any new leasehold tenant free of that security.
Legal framework and common restrictions
Alienation provisions are largely governed by the Landlord and Tenant Act 1927 (‘The Act’). The Act provides that if a lease permits assignment, underletting, charging or parting with possession of the property with the landlord’s consent then, regardless of whether the lease expressly states it or not, this consent is not to be unreasonably withheld or delayed. This means that the landlord should provide consent with reasonable conditions or confirm that consent has not been granted and state the reasons why this has been denied within a reasonable time.
In line with the requirement for landlord consent, the landlord is able to attach conditions or restrictions on any consent they grant. Some of the common conditions and restrictions are set out below:
Qualifying criteria for assignees/subtenants Landlords may require that certain conditions are met in order for them to provide their consent. Conditions can be anything which the landlord believes is reasonable to grant the consent. One of the most common conditions are that the landlord will not consent to any assignment or subletting if there are any outstanding rental arrears due by the tenant, and that consent will not be granted if the potential assignee or subtenant does not have sufficient financial means to be able to comply with the tenant’s obligations under the lease.
Use of premises: Landlords will ordinarily set out that their consent is provided on the provision that the terms of the original lease are complied with. One of these defined lease terms will relate to the use of the property. Every lease will confirm what the permitted use of the property is and the landlord will want any new tenant to continue with the same use that the outgoing tenant had been exercising.
Guarantees and security: The Landlord may request that the outgoing tenant enter into an Authorised Guarantee Agreement (AGA). The AGA effectively confirms that the outgoing tenant will act as a guarantor for the incoming tenant and, if the new tenant fails to comply with any of their obligations under the lease (whether this be in relation to rent or repairs), the outgoing tenant will be responsible for these.
Fees and costs: When a tenant requires the consent of the landlord for any alienation request, it is advisable that the parties instruct legal advisors to assist them with the appropriate documentation. A lease will ordinarily provide that the tenant will be responsible for the landlord’s legal fees and other associated costs that are required in order for the consent to be granted.
How can Goughs help
Our commercial property solicitors specialise in leasehold transactions. Whether you are a landlord or tenant entering into a new lease, renewing your lease or looking for some advice in relation to a particular provision, we are here to help. Our friendly and knowledgeable commercial property team aims to provide you with clear advice and support you every step of the way to ensure that your transaction proceeds as smoothly as possible. Get in contact with us today to see how we can help you.
