Letting your tenant go: consenting to assignment and underletting

If you are a landlord of commercial property, you will have chosen your tenants carefully.  A landlord wants to be sure that a tenant will pay the rent and service charge, and that the tenant will comply with the obligations in the lease so that the property is kept in good repair.

At the same time, a business tenant will want the right to move out and either assign the lease or sublet the property to another business if their circumstances change.  There are legal penalties for landlords who are found to be unreasonable in objecting to a tenant’s proposals, so good legal advice is essential for landlords who want to avoid a dispute while still controlling who becomes their tenant.

Income is vital, but landlords are also looking at the credentials of tenants while trying to maintain the attractiveness of their properties.

‘Letting commercial property isn’t just about collecting the rent,’ according to Anisha Patel, a solicitor in the commercial property team with Ingram Winter Green. ‘The income is vital, but landlords are also looking at the credentials of tenants while trying to maintain the attractiveness of their properties.’  That makes it all the more important to be able to exercise some control over who takes on a lease if the original tenant moves out.

The landlord’s duty to be reasonable

The law on when a landlord can refuse consent to an assignment or underletting has evolved over almost a century.  The starting point is the Landlord and Tenant Act 1927.  Most leases will state that the tenant may not assign without the landlord’s consent.  The 1927 Act states that where landlord’s consent is required, the landlord may not unreasonably withhold it, even if that is not set out expressly in the lease.

The concept of reasonableness is intended to allow flexibility to reflect specific circumstances; what is reasonable in one case might not be in another.

Sixty years later, the Landlord and Tenant Act 1988 turned this into a positive obligation, creating a statutory duty for a landlord to give consent within a reasonable time, unless it is reasonable to refuse it, and not to impose unreasonable conditions.  A landlord must also set out in writing any conditions for giving consent or, if consent is refused, the reasons for the refusal.

The concept of reasonableness is intended to allow flexibility to reflect specific circumstances; what is reasonable in one case might not be in another.  The problem for landlords is to work out how long they can reasonably take over their decision and when they will be reasonable in rejecting a proposed assignee or undertenant.  Fortunately, there is plenty of case law that helps, and your lawyer should be able to advise you.

Reasonable grounds for refusal

The first place to look is the lease itself.  Since 1996, landlords have been allowed to include within a lease specific circumstances in which they will be entitled to refuse consent to an assignment and, further, specific conditions that they will be entitled to impose.  A circumstance for refusal might be where a proposed assignee is an overseas company; an agreed condition might be that the assignee provides a satisfactory guarantor.  Any of these circumstances or conditions will automatically be reasonable.  This applies only to assignments and not to an underletting, but where there is an underletting, a landlord can still enforce the lease obligations against the tenant.

A landlord may also refuse consent or impose conditions for other reasons, if this is reasonable.  The court has established the principle that to be ‘reasonable’, a landlord’s grounds for withholding consent must be linked to the landlord and tenant relationship.  This means that it may be reasonable to withhold consent if the tenant cannot produce accounts and references showing that the proposed assignee is financially sound and able to pay the rent and comply with tenant covenants and obligations contained in the lease.  A landlord may not refuse consent to secure a personal advantage. It would be deemed ‘unreasonable’ to refuse consent because, for example, a landlord wanted to use the property themselves, or if they wanted to persuade the proposed assignee to take a lease of a nearby unit the landlord also owned, instead.

Case law has made it clear that if a landlord has several units or properties close to each other and has set out a formal ‘tenant mix’ policy, it would be reasonable to refuse consent to a proposed assignee or undertenant whose business would not fit with that policy.

How long is too long?

The requirement to give a decision within a reasonable time is another potential issue for landlords.  The best practical advice is to move as quickly as possible once a tenant has made a formal request for consent.  Beyond that, there are some useful pointers to note from case law, as follows:

  • As a rule of thumb, the landlord should aim to give a written decision, with reasons, within 21-28 days, although there may be situations where 21 days is too long, or where it would be reasonable to take longer than 28 days.
  • If the tenant explains that there are reasons for needing a prompt decision, the landlord should take this into account, as it could mean that the reasonable period is shorter than it might otherwise have been.
  • The clock only starts running when the tenant has provided all of the information that the landlord needs to make a reasoned decision. If the initial request is accompanied by only vague financial information, the landlord should ask for additional information and documentation, and do not have to make any decision until such time as this is received and properly clarifies the proposed assignee’s covenant strength.

How we can help

If you have let premises to a tenant whose business is struggling, letting them go and accepting a new tenant could be the best outcome for everyone.  A landlord who gets the consent process wrong could be faced with a damages claim for breach of statutory duty and possibly a court order allowing a tenant to assign or underlet without consent.

Your solicitor should be able to explain to you what your lease permits, as well as offer you advise on what the most commercially focused options for the particular circumstances are, giving you the best opportunity of entering into a cost-effective and amicable transition to a new tenant.

For further information, please contact Anisha Patel in the commercial property team on 020 7845 7460 or email anishapatel@iwg.co.uk.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.