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.
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.