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Assigning a Lease

What does it mean to assign a lease? 

Assignment is the term used to describe the process where a tenant under a lease transfers the lease to someone else (called the “assignee”). When the assignment has taken place, the original tenant ceases to be a tenant under the lease and the assignee becomes the tenant. If you think of the lease as being something that is owned by a tenant, then the lease is effectively sold to a new tenant.

The new tenant then takes over all the rights, obligations and liabilities under the lease and is accountable to the landlord.

Can all leases be assigned?

The question of whether a lease can be assigned and on what conditions will be contained within the lease. In other words, the lease itself will say whether the lease is assignable and if it is, then what conditions must be met as part of the process. Some leases prohibit assignment altogether, others allow an assignment but only on strict conditions.

In most cases, one of the conditions is that the landlord has to give legally binding written consent to an assignment. Usually, the landlord will also want to have vetted the new tenant/assignee in advance and approve them as a condition of the assignment.

The licence to assign

There will normally be a legally binding document in the form of a deed called the “licence to assign”. This is a three-party document which will ultimately be signed by the old tenant, the new tenant and the landlord. The licence to assign gives the landlord’s formal consent to the assignment and also sets out the conditions. It will also ensure that the new tenant has legally binding obligations to the landlord to comply fully with the terms of the lease.
Old tenant acting as guarantor

Most modern commercial leases state that one of the conditions of the landlord agreeing to an assignment is that the old tenant must continue to act as a guarantor until the lease comes to an end. Tenants are often surprised to find that this is the case and acting as a guarantor to the end of the term of the lease can be quite an onerous obligation.

What this means in practice is that even if you sell your lease to someone else, you could still be called upon to pay the rent if the new tenant defaults, or pay for other losses of the landlord if the new tenant breaches other obligations under the lease.

One consequence of this is that if you are a tenant wanting to assign the lease to someone else, you need to make sure that the new tenant is someone who can be trusted and has the financial standing to make sure that the rent and other obligations are complied with.

Summary

The nature of modern business practice is that leases often change hands between tenants. Businesses of all sizes are regularly expanding or downsizing and when they do, they often need to move premises. Having the legal option of assigning a lease or purchasing a lease from someone else is therefore an important feature. Also, of course, if you are buying or selling a business you want to ensure that the lease is properly assigned.

It is important when assigning or taking an assignment to the lease that you are fully appraised of all the legal implications that come with it.

Case Study : Public Inquiry on Change of Entity
Introduction to the Construction, Design and Manag...

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We were approached by an operator who had received public inquiry paper several weeks earlier. The Operator instructed us to represent him at his inquiry listed for a hearing before the Traffic Commissioner’s (TC) only two weeks in advance.

There were several serious issues that the TC indicated he wanted to examine at the hearing and was threatening regulatory action against the Operator Company. The Operator had approached another firm of solicitors, who informed him that the likely outcome of the hearing would be loss of repute and licence revocation.

We provided the Operator with advice about immediate steps to be taken in preparation for the hearing. We requested the operator send us a number of documents critical to the success of his inquiry. A consideration of those document showed significant—but not insurmountable—shortfalls in maintenance standards and legal requirements.

The operator had recently appointed a new Transport Manager (TM) with an excellent reputation in his field. The TM worked along with us in analysing the Company’s compliance systems to create better compliance systems and improve the of the Company’s mindset about such.

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We recently represented two companies who were both called to the same public inquiry. Although separate entities, the companies were closely connected because of having the same set of directors. One of the companies (the Operator) had years previously been issued with a restricted goods vehicle operator’s licence. The other company had recently applied for the same kind of licence (the Applicant).

Over the previous year, the directors had decided to progressively move most of the Operator’s business interests to its sister company the Applicant. Without understanding the potential consequences, and before being granted its operator’s licence, the Applicant began using the Operator’s heavy goods vehicle. The Operator company had not informed the Traffic Commissioner (TC) of its change in business arrangements and of the apparent change of entity (though the companies were actually wholly owned subsidiaries of another company – see below).

The Public Inquiry was convened because of changes at this business group and a fundamental misunderstanding of the operator’s licence regime, and that there had been what appeared to be a change of entity involving the companies.

The TC needed to be satisfied as to whether the companies were not unfit to hold an operator’s licence due to relevant activities and convictions, and about the events relating to a change in the circumstances of the licence holder. The Operator risked revocation of its licence. The Applicant was at risk of not having its licence granted.

In advance of the inquiry, and to start building their case, we obtained as much information as we could about the businesses and provided each company comprehensive legal advice. We examined the companies’ compliance systems and made recommendations about immediate and longer-term changes that needed to be implemented. On our recommendations, the companies invested time and resources into their maintenance and other systems

As a result of our preliminary work and advice, the companies were fully prepared for the public inquiry hearing. In particular, to answer questions and provide evidence about the apparent change of entity.

At the hearing we demonstrated that the companies were running professional and competent businesses. With specific reference to the issue of the apparent change of entity, the TC accepted that Section 3(4) of the Goods vehicle (licencing of operators) Act 1995 was relevant and that this was not a typical “change of entity” case – because of the companies being subsidiaries. We were able to persuade the TC that the issues that lead to the inquiry arose out of ignorance rather than an attempt to mislead or gain financial advantage

The TC granted the new licence to the Applicant with the Operator company voluntarily surrendering its licence. The directors were delighted with the outcome of the public inquiry hearing and that they managed to avoid the damaging consequences they feared.
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We were approached by a small business owner to represent them at the a public inquiry which had been called to consider their application for a new passenger vehicle operator’s licence.

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