Have you reached the point where you need to transfer your lease to a new tenant?
Circumstances change, and sometimes it’s necessary to move on and arrange for a new tenant to take your place. If you’re planning to do this, you’ll need to draw up a formal agreement to make it legally binding.
Fortunately, this step-by-step Assignment Of Lease Template makes the process easy – simply select the bits that apply to you and generate a Word/PDF agreement instantly.
Keep reading if you’d like to understand more about assigning a commercial lease. We discuss when and why you should do it, what it involves, and answer common questions about the process.
What is a commercial lease assignment?
An assignment of lease (not to be confused with a sublease agreement) occurs when a tenant transfers their lease to a new person. The agreement is not broken, but the original tenant removes themselves from it and lets someone else take their place to continue the tenancy.
In a commercial context, a new tenant takes on the commercial property to continue using it for the lease term, under the same conditions that the original tenant did.
Can a landlord refuse to assign a commercial lease?
While lease assignment is a perfectly legal process, there are guidelines to follow, including getting the landlord’s permission. There may be restrictions on the original tenancy agreement which prevent this being allowed.
If that is the case, the tenant must gain consent to assign the tenancy to someone else. In other cases, the tenancy agreement explicitly allows the transfer of the lease, if or when the need arises. Commercial landlords are normally happy to do this rather than face the prospect of an empty commercial property.
Ultimately, however, tenants will need to get written permission from the landlord to allow a commercial lease assignment to a new tenant. The landlord is within their rights to deny lease re-assignment, and may be open to other options, such as a subletting agreement for a limited time.
Reasons for Commercial Lease Assignment
There are various reasons for assigning a commercial lease. It can be due to unfortunate circumstances or new opportunities the tenant has found elsewhere. Here are some occasions when assignment makes sense.
- Selling the business: the original tenant is selling their business, so the lease needs to be transferred as soon as possible.
- Relocation: the original tenant is moving to a new location, either by necessity or opportunity, so a new tenant is needed.
- Financial difficulties: the original tenant can no longer afford the lease and assigns it to avoid breaching the contract.
- Change in business needs: sometimes the property no longer suits the business, for example, it simply has too little space.
- Strategic exit: the tenant wants to exit the lease early and they have found the ideal tenant to replace them, so choose to proceed with the transfer while the opportunity exists.
- Mergers & acquisitions: The tenant’s business has been bought out or has merged with another, necessitating a transfer of the lease.
Key sections to your assignment of commercial lease
Don’t be intimidated by the list below, the template we have provided will help you include each of the necessary details, whatever your specific agreement.
Explore the list below to understand the typical features of a commercial lease re-assignment document, and what each component means…
- Title & parties involved – there needs to be the title of the document, and names and addresses of the current tenant, new tenant, and often the landlord too.
- Lease details – include a description of the lease being assigned (i.e. the original commercial lease), property details, lease terms and duration, and the monthly rent payment.
- Date of new lease assignment – you’ll need to specify a date on which the assignment takes effect for the new tenant.
- Landlord’s consent clause – confirmation of the landlord’s consent must be present for the lease, including reference to any separate Licence to Assign. There may be further terms to include here, stipulated by the landlord.
- Assignor’s/assignee’s responsibilities – explaining that the assignor (old tenant) is transferring all rights, responsibilities, and obligations under the lease to the new tenant. The assignees’ new responsibilities and obligations will be outlined here (e.g. to pay the rent), along with any indemnity for the assignor once the commercial lease has been assigned to the new tenant.
- Landlord’s obligations (if applicable) – Acknowledgment that the landlord recognises the assignee as the new tenant. And confirmation of any Authorised Guarantee Agreement (AGA) requirements – if applicable.
- Covenants & warranties – the assignor must affirm the warranty stating that the lease is valid, unencumbered, and not in breach at the time of assignment. There should also be a ‘covenant’ that the assignee agrees to take on their responsibilities moving forward.
- Noting indemnities – the assignor and assignee should provide indemnities for respective obligations and breaches. This ensures that all parties are appropriately protected from legal action.
- Including ‘consideration’ – essentially, ‘consideration’ includes costs payable to the landlord during legal consultation, drawing up docs and legal agreements, time cost, etc.
- Third-party rights – this is a standard clause excluding third parties from enforcing terms under the Contracts (Rights of Third Parties) Act 1999 unless specifically allowed. Basically, only the landlord, tenant and new tenant can interfere with the agreement – and no one else.
- Include signatures and witnesses – signatures of the assignor, assignee, and landlord (if applicable), plus names, addresses and occupations.
- Schedule of the Lease (if needed) – a more detailed reference to the original lease, potentially as a ‘schedule’ or ‘annex’ which does not clutter the main lease assignment doc. Additional documents, such as the Licence to Assign, should also be noted.
- Governing law clause – Confirmation that the agreement is governed by the laws of England and Wales (or Scotland, depending on the jurisdiction).
- Notice guidelines – There should be details included of how formal notices must be served between the parties.
The commercial lease assignment process explained
There’s a process that needs to be followed when creating a commercial lease assignment agreement. Find the key steps below, which take you from the initial stages of checking your lease to drafting the assignment document, and handing it all over to a new tenant.
- Review the commercial lease agreement
Review the lease to make sure that your allowed to do so, and under what conditions. Plenty of leases include an assignment clause, because it’s a common circumstance to expect in the commercial sector.
At the same time, you’ll need to pick out any lease restrictions or prohibitions that might limit the next tenant. For example, the way the property can be used.
- Make sure the landlord gives permission
It’s essential to inform the landlord of the lease re-assignment and get their permission. The process can’t move forward without it. The landlord will likely want to perform checks on the incoming tenant and potentially get the current tenant to sign an Authorised Guarantee Agreement (AGA). This makes the tenant liable (to some extent) if the new tenant defaults on their lease.
- Find a new tenant!
It’s obviously crucial to find a new tenant. If you raise the prospect of moving on, your landlord may already have someone in mind to take your place. The responsibility, however, lies with the tenant to find a viable replacement – or they will remain liable for the lease and can’t proceed with the re-assignment.
- 4. Always get legal advice
Both the current tenant (legally, an ‘assignor’) and the new tenant (‘assignee’) should get legal advice before proceeding to make sure the process is by the book and binding. Sometimes a surveyor also assesses the condition of the property for the next tenant.
- 5. Draw up lease re-assignment documents
The assignor and assignee must draft and negotiate the necessary legal documents for the assignment. This includes an assignment agreement – find a great template here – that transfers the lease, as well as the Licence to Assign and Deed of Assignment prepared by the landlord’s solicitor, the first of which set out the terms of the landlord’s consent, and the second which officially transfers responsibility to the assignee (via the Land Registry) .
- 6. Conduct a review of the property
The new tenant will check over the property and review it for any issues, which they will raise with the landlord and current tenant.
- 7. Seal the deal
Once terms are agreed, all the legal docs are signed to transfer the commercial lease to the assignee. At this stage, the old and new tenants pay any fees to the landlord regarding legal expenses (and any other costs outlined in the original tenancy agreement).
At that point, the new tenant will move in and assume responsibility for the lease – completing the lease assignment.
Challenges of commercial lease assignment
Drawing up your lease assignment is one part of a delicate process. And there are a couple of challenges you are likely to encounter during the process. We’ve mentioned one difficulty already; the fact that you will need to get written permission from the landlord to proceed with the re-assignment.
Another key challenge is finding a viable tenant within the right timescale with the right business model and income to fill your spot.
This might be easy with run-of-the-mill premises, but not so much for a specialised facility that only suits a couple of business types. This is likely to be your biggest challenge when re-assigning the original lease.
Differences between an assignment of lease and sublet agreement
You might wonder whether you want to sublet your commercial property or re-assign the lease. These two things are different.
A sublease allows the tenant to maintain their original lease with the landlord (and their various obligations), and then let a sub-tenant occupy the property and operate their business there for a specified time – with the tenant acting as a ‘sub-landlord’.
Subleasing carries more risk and uncertainty for all parties involved, while a new lease assignment neatly transfers responsibility from one tenant to another. There are many reasons why one might work better than the other, it might simply be that the landlord is more comfortable with a full lease transfer rather than the complexity of a subletting arrangement.
Feel comfortable assigning a commercial lease (UK)?
Hopefully, our article helps you understand how a commercial lease assignment form works and when to use one. Once you feel you understand the process, why not take a look at this adaptable commercial lease assignment template? Once you’ve selected your criteria, you can download it in PDF or Word format and use it according to your needs.