Leases and underleases - Alienation clauses (assignment, sub...

Learning Outcomes

This article explains alienation clauses in leases and underleases, including:

• The legal meaning of alienation clauses and distinctions between assignment, subletting, sharing occupation, and parting with possession
• Absolute, qualified, and fully qualified covenants, and the effect of section 19(1) of the Landlord and Tenant Act 1927
• Landlord’s statutory duties under the Landlord and Tenant Act 1988, including time limits and written reasons for refusal
• Liability on assignment under the Landlord and Tenant (Covenants) Act 1995 for new leases, and the operation and limits of Authorised Guarantee Agreements (AGAs)
• Reasonable grounds for refusing landlord consent and permissible conditions, including parameters under section 19(1A)
• Typical conditions attached to subletting and drafting of subleases to mirror head lease obligations
• Remedies and risks where alienation occurs in breach of covenant, including forfeiture, damages, injunctions, and practical steps for relief
• Application of principles to SQE1-style scenarios

SQE1 Syllabus

For SQE1, you are required to understand the operation and effect of alienation clauses in leases and underleases, with a focus on the following syllabus points:

• The legal meaning and function of alienation clauses in leases.
• The distinction between assignment and subletting.
• The statutory rules governing landlord consent to assignment and subletting.
• The effect of the Landlord and Tenant Act 1927 and the Landlord and Tenant (Covenants) Act 1995.
• The use and limitations of Authorised Guarantee Agreements (AGAs).
• The consequences of breaching alienation provisions.
• How to advise on and draft suitable alienation clauses in leases.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the difference between an assignment and a subletting of a lease?
2. Under what circumstances can a landlord refuse consent to an assignment or subletting?
3. What is the effect of an Authorised Guarantee Agreement (AGA) in a lease granted after 1 January 1996?
4. What are the consequences if a tenant assigns or sublets in breach of a qualified covenant?

Introduction

Alienation clauses in leases control how tenants can transfer their leasehold interests to others. These clauses are essential in commercial and residential leases, as they balance the landlord’s need to control occupation and the tenant’s need for flexibility. The law distinguishes between assignment (transfer of the whole lease) and subletting (grant of a new lease out of the tenant’s interest). Statutory rules and case law set limits on how landlords can restrict or control these dealings.

Alienation covenants sit alongside user, alterations, repair and rent provisions in most leases. They directly affect the marketability and value of the tenant’s interest and, in commercial leases, can influence rent review outcomes because onerous alienation restrictions typically depress the open market rental value for the hypothetical letting at review.

Key Term: alienation clause
A lease provision restricting or regulating the tenant’s ability to assign, sublet, or otherwise deal with their leasehold interest.

Alienation Clauses: Purpose and Types

Alienation clauses specify whether, and on what terms, a tenant may assign (transfer) or sublet (grant a lease out of) their interest in the property. They are usually found in commercial leases but are also relevant in long residential leases. In the absence of express restriction, a tenant can deal with their leasehold interest as they choose; in practice, landlords almost always include restrictions to retain control.

Typical alienation clauses in modern leases address:

• Assignment.
• Underletting/subletting (of whole and/or part).
• Charging/mortgaging of the lease.
• Sharing occupation (for example, with group companies or concessionaires).
• Parting with or sharing possession, or holding the lease on trust for another.

The content and scope of these prohibitions and permissions are negotiated to balance flexibility with landlord control. For example, a prohibition on parting with possession except by assignment or subletting prevents informal arrangements (such as a licence to occupy) that would bypass the consent regime.

Key Term: assignment
The transfer of a tenant’s entire leasehold interest to a new tenant (assignee), who steps into the lease for the remainder of the term.

Key Term: subletting
The grant by a tenant of a new lease (sublease) out of their own lease, for a term less than their own, while the tenant remains liable to the landlord under the head lease.

Alienation clauses can take several forms:

• Absolute covenant: Prohibits assignment or subletting entirely.
• Qualified covenant: Permits assignment or subletting only with the landlord’s consent.
• Fully qualified covenant: Permits assignment or subletting with landlord’s consent, which must not be unreasonably withheld.

Key Term: qualified covenant
A lease provision allowing assignment or subletting only with the landlord’s consent.

Key Term: fully qualified covenant
A lease provision allowing assignment or subletting with landlord’s consent, which cannot be unreasonably withheld.

In commercial leasing, a common drafting approach is to include an absolute prohibition on all dealings, followed by specific carve-outs permitting assignment and/or subletting subject to detailed conditions. Examples include permitting assignment of the whole subject to consent, requiring financial references and an AGA, but prohibiting assignment of part. Subletting might be permitted only of the whole, at a rent not less than market rent, on terms mirroring the head lease, with the sublease contracted out of statutory security of tenure.

Statutory Framework: Landlord’s Consent

Landlord and Tenant Act 1927

Section 19(1) of the Landlord and Tenant Act 1927 upgrades qualified covenants against assignment or subletting by implying that landlord’s consent “is not to be unreasonably withheld.” This means that, unless the lease expressly prohibits assignment or subletting (absolute covenant), the landlord must act reasonably when considering a tenant’s request. The provision applies to any qualified consent covenant relating to dealing with the lease (assignment, subletting, charging or parting with possession).

Section 19(1) also restricts what landlords can demand as the price of consent. They cannot impose a fine or require payment of an increased rent merely for consenting. However, they may require the tenant to pay the landlord’s reasonable legal and administrative costs relating to the consideration of the application and the preparation of the consent documentation.

Section 19(1A) (relevant to assignment provisions in new commercial leases) enables landlords to include, at the outset of the lease, specified circumstances in which consent to assignment may be withheld and conditions that may be attached to consent. Where properly drafted, those specified circumstances and conditions take effect according to their terms without being subject to a separate reasonableness test, although the landlord remains subject to the general duty to consider and respond within a reasonable time.

Section 1 of the Landlord and Tenant Act 1988 further requires landlords (and other parties whose consent is required) to:

• Give consent or refusal within a reasonable time after receiving a written application from the tenant.
• Give written reasons if refusing consent.
• Pass the application on promptly to any superior landlord or other person whose consent is also required.

A failure to comply can expose the landlord to a claim for damages. Whether the time taken was reasonable is fact-specific; courts often regard a period of around four weeks as a reasonable baseline, depending on complexity. Landlords may reasonably request information necessary to assess the application (such as financial accounts or references) but cannot use information requests to delay the process unduly.

Key Term: Authorised Guarantee Agreement (AGA)
An agreement under which an outgoing tenant guarantees the immediate assignee’s performance of lease covenants after assignment, as permitted by the 1995 Act.

Landlord and Tenant (Covenants) Act 1995

For leases granted on or after 1 January 1996, the Landlord and Tenant (Covenants) Act 1995 (“the 1995 Act”) changed the rules on liability after assignment. The outgoing tenant is automatically released from future liability unless they enter into an Authorised Guarantee Agreement (AGA). The 1995 Act distinguishes “old leases” (granted before 1 January 1996) from “new leases” (granted on or after that date):

• Old leases: The original tenant remains liable under privity of contract even after assignment. If a landlord wishes to pursue a former tenant for arrears or breaches occurring after assignment, they must serve a statutory notice (commonly referred to as a section 17 notice under the 1995 Act) within six months of the arrears falling due. Former tenants who pay under such a notice may be entitled to an overriding lease to give them control against the defaulting assignee.
• New leases: Privity of contract liability is abolished for outgoing tenants. Instead, an outgoing tenant may be asked to give an AGA, but this can only guarantee the immediate assignee’s performance and must comply with statutory limits. The landlord can require an AGA as a condition of consent only if it is reasonable to do so and the lease permits such a requirement.

The 1995 Act also contains anti-avoidance provisions preventing landlords from drafting around the release regime (for example, by attempting to require guarantees of future assignees or imposing continuing liabilities beyond the immediate assignee).

Assignment: Process and Landlord’s Consent

Assignment involves the tenant transferring their entire leasehold interest to an assignee. The lease will specify whether assignment is permitted and, if so, on what terms.

• If the lease contains an absolute covenant, assignment is prohibited.
• If the lease contains a qualified or fully qualified covenant, assignment is permitted with landlord’s consent, which must not be unreasonably withheld.

The application process will typically require:

• A formal written application to the landlord, identifying the proposed assignee, enclosing financial accounts and references, business plans (if relevant), and details of proposed use.
• Confirmation that the assignee will comply with the user covenant and all other lease terms.
• Agreement to any reasonable conditions, such as an AGA, rent deposit or guarantor, where appropriate and permitted by the lease.

Landlords can only refuse consent on reasonable grounds. Common reasonable grounds include:

• The proposed assignee lacks adequate financial standing or trading history, creating real risk of non-performance.
• The assignee’s intended use would breach the user covenant or planning restrictions.
• The tenant is in arrears or in material breach of other lease covenants, such that granting consent would be inappropriate until breaches are remedied.
• The assignment would adversely affect the landlord’s property interests in a way contemplated by the lease (for example, undermining a tenant mix policy in a shopping centre, if such a policy is established and consistently applied).

Where leases are “new leases” (granted on or after 1 January 1996), the landlord may require the outgoing tenant to enter into an AGA as a condition of consent, but only if the lease expressly allows this or it is reasonable to do so. Typical circumstances where an AGA is reasonable include assignments to newly formed companies with limited covenant strength or where there are concerns about the assignee’s financial standing.

Reasonableness in withholding consent is assessed by reference to grounds relating to the landlord and tenant relationship and the lease, not extraneous or discriminatory factors. Personal dislike of the assignee, or an attempt to extract a premium or increased rent, is not permissible.

Exam Warning Landlords must give written reasons for refusing consent. Failure to do so may make the refusal invalid and can lead to damages under the Landlord and Tenant Act 1988.

If consent is granted, it will usually be documented by a licence to assign. The licence may:

• Record the landlord’s consent and any conditions.
• Include a covenant by the assignee to observe and perform the lease covenants directly with the landlord.
• Include an AGA given by the outgoing tenant (where required).
• Confirm that any arrears or existing breaches have been remedied or secured before completion.

Worked Example 1.1

A tenant wishes to assign their lease to a new company. The lease contains a qualified covenant against assignment. The landlord refuses consent, stating only that they “do not like the proposed assignee.”

Answer:
The landlord’s refusal is likely to be unreasonable. The landlord must have a valid, lease-related reason for refusing consent. Disliking the assignee is not sufficient.

Worked Example 1.2

The lease permits assignment of the whole with consent and states that, on assignment, the outgoing tenant “will provide any guarantee of performance required by the landlord.” The landlord insists on an AGA for the proposed assignment to a newly formed assignee.

Answer:
For a new lease (post-1996), an AGA can be required as a condition of consent where reasonable. Assignment to a newco with limited covenant strength is a scenario where an AGA is commonly reasonable, provided the AGA is limited to the immediate assignee and complies with statutory limits.

Subletting: Process and Landlord’s Consent

Subletting involves the tenant granting a new lease out of their own leasehold interest. The sublease must be for a term less than the tenant’s own lease. The lease will specify whether subletting is allowed and, if so, on what terms.

• Absolute prohibition: Subletting is not permitted.
• Qualified/fully qualified covenant: Subletting is permitted with landlord’s consent, which must not be unreasonably withheld.

Typical subletting conditions include:

• Subletting only of the whole (subletting of part often prohibited to avoid management fragmentation). If subletting of part is permitted, the lease will usually require plans and separate demise and services arrangements.
• Sublease rent at no less than open market rent, with rent review provisions aligned to the head lease cycle where appropriate.
• No premium or reverse premium.
• Sublease term not exceeding the residue of the head lease and expiring at least a few days before the head lease expiry.
• Sublease to include terms mirroring key head lease covenants (repair, user, alterations, insurance contributions, and compliance with the landlord’s regulations).
• Sublease contracted out of security of tenure under the Landlord and Tenant Act 1954, with statutory notices and declarations properly completed.
• Prohibition on the subtenant assigning or further subletting without consent.
• A requirement for the subtenant to give a direct covenant to the landlord on specific obligations where needed for enforceability.

In considering consent to subletting, landlords may reasonably object where the proposed subtenant lacks covenant strength, where the sublease terms would undermine head lease covenants, or where the subletting would lead to management difficulties or breach planning or user constraints.

Key Term: head lease
The original lease granted by the landlord to the tenant, out of which a sublease may be granted.

Key Term: sublease (underlease)
A lease granted by a tenant out of their own leasehold interest, for a term less than their own, while the tenant remains liable under the head lease.

Worked Example 1.3

A tenant grants a sublease for a term longer than their own lease. Is the sublease valid?

Answer:
No. A tenant cannot grant a sublease for a term longer than their own lease. The sublease will be limited to the tenant’s remaining term, so any purported excess will not take effect.

Worked Example 1.4

A head lease permits subletting of the whole at not less than market rent and requires the sublease to be excluded from the Landlord and Tenant Act 1954. The tenant proposes a sublease with a premium and statutory protection. The landlord refuses consent.

Answer:
The refusal is likely reasonable. The proposed terms conflict with express conditions: charging a premium and granting statutory protection where contracting out is required undermines agreed controls. Consent can be refused on that basis.

Authorised Guarantee Agreements (AGAs)

For leases granted on or after 1 January 1996, the outgoing tenant is automatically released from future liability on assignment. However, the landlord may require the outgoing tenant to enter into an AGA, guaranteeing the immediate assignee’s performance of the lease covenants. The AGA cannot extend to future assignees and must not impose obligations beyond the lease covenants being guaranteed.

AGAs are typically justified where:

• The assignee’s financial standing is weaker than the outgoing tenant’s.
• The assignment is part of a corporate reorganisation transferring the lease to a special purpose vehicle.
• The lease is valuable and the landlord reasonably seeks comfort for performance.

AGAs may be accompanied by a rent deposit and/or a third-party guarantor for the assignee. Any AGA must comply with statutory constraints and cannot be used to maintain ongoing liability after the assignee itself assigns the lease.

Revision Tip AGAs are only permitted for the immediate assignee and only if the lease allows or it is reasonable to require one.

Worked Example 1.5

A tenant assigns their lease and enters into an AGA. The assignee later assigns the lease to a third party. Is the original tenant still liable?

Answer:
No. The AGA only covers the immediate assignee. Once the assignee assigns the lease, the original tenant is released from liability under the AGA.

Breach of Alienation Clauses

If a tenant assigns or sublets without landlord’s consent where required, this is a breach of covenant. The landlord may have remedies, including:

• Forfeiture of the lease (if the lease contains a forfeiture clause).
• Injunction to prevent unauthorised assignment or subletting.
• Damages for any loss suffered.

If an unauthorised dealing has taken place, the landlord may serve a section 146 notice (if the breach is remediable and the lease includes a forfeiture provision) specifying the breach and requiring remedy within a reasonable time. Unauthorised assignments are typically not remediable in the sense of reversing the transaction; however, the landlord may waive the breach or grant retrospective consent. Courts can grant relief from forfeiture depending on the circumstances, including the tenant’s conduct and steps taken to regularise the breach.

Landlord delay or unreasonable refusal of consent can expose the landlord to damages under the Landlord and Tenant Act 1988. A tenant considering proceeding without consent risks forfeiture, damages and the transaction being ineffective if the lease expressly prohibits dealings without consent.

Key Term: forfeiture
The landlord’s right to terminate the lease early due to tenant’s breach of covenant, such as unauthorised assignment or subletting.

Worked Example 1.6

A tenant sublets part of the premises without landlord’s consent, breaching a qualified covenant. What can the landlord do?

Answer:
The landlord may serve a section 146 notice (if required), seek to forfeit the lease, or claim damages, depending on the lease terms and the seriousness of the breach. Relief from forfeiture may be available if the breach can be regularised and the tenant acts promptly.

Practical Drafting Points

When advising on or drafting alienation clauses, consider:

• Whether assignment and subletting are permitted at all, and if so, whether only of the whole or also of part. Prohibiting assignment of part is common to avoid fragmentation.
• Conditions and restrictions for assignment:
  • Financial thresholds for assignees; requirement for accounts/references.
  • AGA requirement (for new leases) where reasonable, plus possible rent deposit or third-party guarantor.
  • Group company assignments and whether intra-group transfers are permitted with lighter conditions.
  • Pre-agreed circumstances and conditions under section 19(1A) (for assignment in new commercial leases), ensuring they are clearly set out.
• Conditions for subletting:
  • Market rent, no premium, term limitations and contracting out of the Landlord and Tenant Act 1954 where appropriate.
  • Mandatory mirroring of key head lease covenants and landlord’s regulations.
  • Prohibition on the subtenant assigning or subletting further without consent.
• Process and time limits for seeking landlord’s consent:
  • Written application and information requirements.
  • Reasonable time for response and duty to give reasons if refusing (Landlord and Tenant Act 1988).
  • Treatment of superior landlord consents and passing applications promptly.
• Whether AGAs are permitted or required for assignment of new leases, and ensuring the drafting complies with the statutory limits.
• Clarifying that consent will not be unreasonably withheld or delayed and specifying examples of reasonable grounds for refusal (for transparency).
• Ensuring alienation provisions align with rent review assumptions and disregards. Onerous alienation restrictions can depress open market rent on review; landlords may seek to exclude some restrictions from the hypothetical letting terms to avoid adverse rent review outcomes, which tenants may resist.

Revision Tip Always check the lease wording and the relevant statutory provisions before advising on assignment or subletting. For old leases (pre-1996), consider section 17 notice requirements if former tenant liability is in issue.

Worked Example 1.7

A tenant makes a written application for consent to assign and provides full financial information about the proposed assignee. Six weeks later, the landlord has neither responded nor asked for further information. The tenant loses the buyer and suffers financial loss.

Answer:
The landlord may be liable for damages under the Landlord and Tenant Act 1988 for failing to give consent or refusal within a reasonable time and for failing to give written reasons. Whether six weeks is unreasonable will depend on complexity, but where adequate information was provided and no further information was requested, this delay is likely to be unreasonable.

Worked Example 1.8

A lease contains a fully qualified covenant against assignment. The landlord offers consent but only if the tenant pays a premium and agrees to increase the rent by 10% from the next quarter.

Answer:
This is improper. Section 19(1) of the Landlord and Tenant Act 1927 precludes imposing a fine or increasing rent merely as a condition of consent. Consent can be conditioned on reasonable matters (e.g., AGA, references, rent deposit), but not on a premium or rent increase.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Alienation clauses regulate assignment and subletting in leases, and often also address charging, sharing occupation and parting with possession.
• Assignment is the transfer of the whole lease; subletting is the grant of a new lease out of the tenant’s interest for a shorter term.
• Qualified and fully qualified covenants require landlord’s consent, which cannot be unreasonably withheld, and must be dealt with within a reasonable time with reasons for refusal (Landlord and Tenant Act 1927 and 1988).
• Section 19(1A) of the Landlord and Tenant Act 1927 allows pre-agreed circumstances and conditions for assignment consent in new commercial leases.
• The Landlord and Tenant (Covenants) Act 1995 governs liability after assignment of new leases and permits AGAs limited to the immediate assignee.
• For old leases (pre-1996), former tenants may remain liable; enforcement requires service of a statutory notice within strict time limits.
• Breach of alienation provisions may entitle the landlord to forfeit the lease, seek injunctions, and claim damages; relief from forfeiture may be available.
• Practical drafting should balance landlord control with tenant flexibility, specify clear consent procedures, and consider the impact on rent review.

Key Terms and Concepts

• alienation clause
• assignment
• subletting
• qualified covenant
• fully qualified covenant
• Authorised Guarantee Agreement (AGA)
• head lease
• sublease (underlease)
• forfeiture