When your tenant sells their business
A common question that arises for landlords owning commercial premises (or tenants leasing those premises) is what happens to the lease when your tenant sells their business. The answer to this is usually found in the deed of lease itself.
Assignment of the lease
When your tenant sells the assets of their business, the lease of their premises will usually be assigned to the purchaser on the settlement date. This is documented by you (as landlord), your tenant (as assignor) and the purchaser (as assignee) entering into a deed of assignment, which will assign the rights and obligations of the lease to the purchaser of their business. Your existing tenant will usually continue to be liable under the lease for the remainder of the current lease term. The assignee will also be liable to meet the lease obligations.
Under The Law Association (previously the ADLS) form of deed of lease, your tenant cannot assign the lease without your prior written consent, which you cannot unreasonably withhold. Your tenant must demonstrate to your (reasonable) satisfaction that the proposed assignee is respectable and has the financial resources to meet the obligations of the tenant under the lease. Your tenant must also be up to date with rent and not be in breach of the lease. You may also be able to request a bank guarantee or a personal guarantee from the proposed assignee.
Your reasonable legal fees relating to the assignment of the lease will usually be paid by your tenant.
Deemed assignment
If your tenant is a company, the shareholding in that company may change. Existing shareholders may be selling some (or all) of their company shares to a third party, or transferring some (or all) of their company shares to other existing shareholders.
Where shares in your tenant’s company are being sold, you will not need a deed of assignment as the tenant will remain the same. However, if those shareholding changes result in a change in control of the company, which is a deemed assignment under the lease, your tenant is required to obtain your written consent before transferring the shares.
You will have the opportunity to assess the financial resources and experience of the incoming shareholder and propose reasonable conditions to your consent as part of the process. You, the exiting shareholders and the new shareholders will need to negotiate in relation to the release or replacement of any existing guarantees (and provision of new security) as part of your consent.
Agreement to lease
You may not have a deed of lease with your tenant, with the terms of your lease instead documented in an agreement to lease, which is a basic document setting out the broad material terms without going into detail about the day-to-day workings of the lease (which is contained in the deed of lease). A tenant’s rights and obligations under an agreement to lease cannot be assigned, so if your tenant is selling their business and wishes to assign its lease which is documented in an agreement to lease, they will first need to enter into a deed of lease with you, which can be assigned to the purchaser of the business (with your consent).
While agreements to lease can be helpful for the parties to initially agree material terms, they still technically require both parties to enter into a deed of lease reflecting those terms. We recommend that you promptly enter into a deed of lease after signing any agreement to lease so that both parties are aware of their full rights and obligations under all the terms of the lease.
We can help
Whether you are a landlord or a tenant negotiating an assignment of the lease, we recommend early contact with us.
If you are a landlord, we can advise on what information you should request from any proposed assignee to allow you to make an informed decision with regard to whether you consent to the assignment of the lease.
We can help both landlords and tenants in navigating what is and is not reasonable from each party in the circumstances.
