Pre-completion formalities

Introduction

Assignment of a lease is the legal process by which an existing tenant (assignor) transfers their leasehold interest to a new tenant (assignee). This transfer requires strict adherence to pre-completion formalities to ensure that the assignment is valid and that the rights and obligations of all parties are properly managed. Key requirements in this process include thorough verification of the lease title, securing the necessary consent from the landlord, and addressing any tenant covenants and indemnities that may affect liability. Understanding these elements is essential for executing lease assignments effectively within the framework of property law.

Title Verification: Uncovering the Lease's History

Title verification is a fundamental step in the lease assignment process, akin to a thorough background check before entering into a significant agreement. It involves examining the leasehold title to confirm the assignor's right to assign the lease and to identify any encumbrances or restrictions that may impact the assignment.

Registered Titles

For properties with registered titles, the verification process includes:

1. Obtaining Official Copies: Acquiring up-to-date official copies of the leasehold title and the freehold title (if applicable) from HM Land Registry.

2. Reviewing the Proprietorship Register: Checking for any restrictions or covenants that may limit the assignor's ability to assign the lease.

3. Examining the Charges Register: Identifying any mortgages, charges, or other financial encumbrances affecting the property.

4. Confirming Boundaries: Ensuring the physical boundaries of the property align with the details in the title plan.

By meticulously reviewing these documents, potential issues such as restrictive covenants or undisclosed third-party rights can be identified and addressed before completion.

Unregistered Titles

When dealing with unregistered titles, the process is more complex, requiring:

1. Investigating Title Deeds: Examining a chain of title deeds covering at least 15 years to establish a good root of title.

2. Identifying Discrepancies: Detecting any gaps or irregularities in the title that could affect the assignor's ability to assign the lease.

3. Land Charges Searches: Conducting searches at the Land Charges Registry to uncover any adverse entries, such as equitable charges or restrictive covenants not apparent from the deeds.

4. Reviewing Other Documents: Assessing any easements, rights of way, or other interests affecting the property.

This thorough investigation ensures that the assignee receives a valid title and is aware of all obligations attached to the property.

Leasehold Specific Considerations

For leasehold properties, additional scrutiny is required:

1. Reviewing the Original Lease and Variations: Understanding the terms of the lease, including any variations, supplemental deeds, or licences that may have altered the original agreement.

2. Confirming the Lease Term: Verifying the remaining term of the lease and any options to renew or break clauses.

3. Assessing Service Charges and Ground Rent: Evaluating the obligations for service charges, ground rent payments, and any review provisions.

4. Identifying Alienation Provisions: Checking for any clauses that restrict or regulate the assignment of the lease.

By thoroughly examining these aspects, the parties can identify any potential hurdles and ensure compliance with the lease terms during the assignment.

Landlord's Consent: Understanding Legal Requirements

Securing the landlord's consent is often a key step in assigning a lease, governed by both the terms of the lease and statutory provisions such as the Landlord and Tenant Act 1988.

Lease Provisions and Statutory Framework

Most leases contain clauses requiring the tenant to obtain the landlord's consent before assigning the lease. Under the Landlord and Tenant Act 1988, the landlord has a duty to:

1. Respond Promptly: The landlord must give consent within a reasonable time after the tenant's written application.

2. Act Reasonably: Consent should not be unreasonably withheld, and any conditions imposed must be reasonable.

3. Provide Written Reasons: If consent is refused, the landlord must provide written reasons for the refusal.

Reasonableness in Withholding Consent

The concept of reasonableness is evaluated objectively, considering:

• Financial Standing: The assignee's ability to meet the financial obligations under the lease.

• Use of the Property: Whether the intended use by the assignee aligns with the permitted use under the lease.

• Estate Management: Any legitimate concerns the landlord may have regarding the management of the property.

Courts have held that landlords cannot refuse consent based on factors unrelated to the landlord-tenant relationship or for reasons that are capricious or discriminatory.

Practical Steps for Obtaining Consent

To facilitate the consent process, the tenant should:

1. Submit a Formal Application: Provide a written request to the landlord, detailing the proposed assignment.

2. Supply Relevant Information: Include financial and business references for the assignee to demonstrate their suitability.

3. Address Potential Concerns: Proactively identify and mitigate any issues the landlord might raise.

4. Negotiate Reasonable Conditions: Be prepared to agree to conditions such as providing a guarantor or entering into an Authorised Guarantee Agreement (AGA).

By taking these steps, the tenant can help ensure a smoother consent process and reduce the likelihood of delays.

Tenant Covenants and Indemnities: Managing Continuing Obligations

Tenant covenants and indemnities are important in determining the liabilities of the assignor and assignee after the assignment, particularly in light of the Landlord and Tenant (Covenants) Act 1995.

Pre-1996 Leases: Privity of Contract and Estate

For leases granted before 1 January 1996:

• Privity of Contract: The original tenant remains liable for the tenant covenants throughout the term of the lease, even after assignment.

• Continuing Liability: The assignor may be pursued by the landlord for breaches of covenant by subsequent assignees.

This ongoing liability highlights the importance of obtaining appropriate indemnities from the assignee to protect the assignor.

Post-1995 Leases: Release from Liability and AGAs

For leases granted on or after 1 January 1996:

• Automatic Release: The Landlord and Tenant (Covenants) Act 1995 provides that the assignor is automatically released from future liabilities upon assignment, unless an AGA is required.

• Authorised Guarantee Agreements: The landlord may require the assignor to enter into an AGA, guaranteeing the assignee’s performance of the tenant covenants.

Authorised Guarantee Agreements (AGAs)

AGAs must comply with statutory requirements and are subject to reasonableness:

• Statutory Compliance: AGAs must follow the provisions of the 1995 Act to be enforceable.

• Reasonableness: The landlord's requirement for an AGA must be reasonable in the circumstances.

• Scope of Guarantee: The AGA typically covers the immediate assignee and lasts until that assignee lawfully assigns the lease.

Indemnities and Guarantees

To manage risks, the assignor may:

• Obtain Indemnities: Require the assignee to indemnify the assignor against any future breaches of the lease covenants.

• Seek Guarantors: Request that the assignee provides a guarantor to strengthen security.

These measures help to protect the assignor from potential liabilities arising after the assignment.

Practical Example: From TechCorp to MegaCorp

Consider a scenario where TechCorp, the existing tenant under a commercial lease granted in 2010, wishes to assign the lease to MegaCorp.

Title Verification

• Registered Leasehold Title: TechCorp's leasehold interest is registered.

• Review of Title Documents: The assignor's solicitor obtains official copies and identifies a restriction requiring landlord's consent for any assignment.

• No Adverse Entries: No other encumbrances are found that would impede the assignment.

Landlord's Consent

• Applying for Consent: TechCorp submits a formal application to the landlord, providing details about MegaCorp.

• Assignee's Financial Standing: MegaCorp provides financial statements and references demonstrating its ability to fulfill the lease obligations.

• Landlord's Response: The landlord agrees to consent, subject to reasonable conditions, including an AGA.

Tenant Covenants and Indemnities

• Authorised Guarantee Agreement: TechCorp agrees to enter into an AGA, guaranteeing MegaCorp's performance until such time as MegaCorp assigns the lease.

• Indemnity Agreement: MegaCorp indemnifies TechCorp against any breaches of the lease covenants after the assignment.

This example illustrates how title verification, obtaining landlord's consent, and managing tenant covenants interact in a lease assignment, ensuring that all parties' interests are protected.

Conclusion

Managing tenant covenants during lease assignments involves complex considerations under the Landlord and Tenant (Covenants) Act 1995, particularly regarding the assignor's potential liabilities and the use of Authorised Guarantee Agreements. The interplay between statutory provisions and lease terms dictates whether an assignor remains liable for breaches after the assignment. This complexity highlights the importance of meticulous title verification to identify any assignment restrictions or covenants that may affect the transaction. Securing the landlord's consent requires careful attention to both contractual obligations and statutory duties, ensuring that consent is obtained lawfully and reasonably. The practical example of TechCorp and MegaCorp demonstrates how these elements work together in practice, highlighting the need for careful preparation and adherence to legal requirements. By thoroughly addressing these pre-completion formalities—verifying the lease title, obtaining necessary consents, and managing tenant covenants—the parties can execute a lease assignment that upholds legal standards and protects their respective interests.