#14733 - Assignment Underletting - Property Law and Practice

Assignment & Underletting

Definitions

Assignment

An assignment is where a Tenant sells on the remainder of an existing term of a lease to another party (the ‘Assignee’) who then becomes the Tenant of the Landlord.

The Landlord’s consent will be required before assignment can occur. This consent will be documented in a License to Assign which is signed by the Tenant, Landlord and Assignee (creating privity of contract).

A TR1 will be used to register the new assignee on the existing lease (if the lease is already registered) within 28 days (i.e. the OS1 priority period). If the lease is not registered then a Deed of Assignment will be used. Deeds of Guarantee can also be required to ensure the Assignee can meet their obligations under the lease.

Underletting

An underletting is where a Tenant grants a lease out of their own lease (called an ‘underlease’). The terms of the underlease will be the same as the ‘headlease’ (the Tenant’s original lease) with the exception of rent.

The Landlord’s consent will be required before an underletting can occur. This consent will be documented in a License to Underlet which is signed by the Tenant, Landlord and Sub-Tenant (creating privity of contract).

The Sub-Tenant will use a TR1 to register the underlease if it is over 7 years in length. Deeds of guarantee can also be used to ensure the Sub-Tenant can meet their obligations under the underlease.

Alienation

What Clause Relates to Alienation?

Identify the lease clause and what type of alienation it relates to: i.e. assignment or underletting. If there are no restrictions on alienation in the lease then the Tenant may do what they please. Clauses in the lease help the Landlord restrict the Tenant’s freedom.

What Type of Covenant is it?

Identify what type of covenant is being used: i.e. absolute covenant (‘the Tenant shall not…’), qualified covenant (‘the Tenant shall not… without the Landlord’s consent’) or a fully qualified covenant (‘the Tenant shall not… without the Landlord’s consent, such consent not to be unreasonably withheld or delayed’).

Is it an Old or New Lease?

s.17 LT(C)A created old and new leases.

Old leases are those which were created before 1 January 1996; under these leases the original Tenant will remain liable for the whole term of the rent, whether or not alienation has occurred. Therefore, original Tenants will be liable if the Sub-Tenant or Assignee fails to meet their obligation under the lease.

New leases are those which are created from 1 January 1996; the original Tenant is no longer liable when there has been a lawful assignment. However, it is common practice for Landlords to require Tenants who are assigning their lease to enter in AGA (s.16 LT(C)A) in which case the Tenant will only be liable for the Tenant before them. A chain of AGAs can be created ensuring every Tenant remains liable for the Tenant that takes over from them.

If there is an underletting there is no requirement for the Tenant to give an AGA.

What Statutes & Case Law Apply?