Leases and underleases - Alienation clauses (assignment, subletting)

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Overview

Alienation clauses are key provisions in lease agreements that dictate a tenant's ability to transfer their leasehold interest. For those preparing for the SQE1 FLK2 exam, a thorough understanding of these clauses is essential. This article explores alienation clauses, focusing on assignment and subletting, their legal effects, and their role in modern leasehold transactions.

Legal Framework and Statutory Context

Landlord and Tenant Act 1927

The Landlord and Tenant Act 1927 plays a significant role in shaping alienation clauses. Section 19(1) addresses prohibitions against assignment or subletting in leases granted after 1995:

"In all leases... containing a covenant... against assigning, underletting... such covenant... shall... be subject to a proviso... that such licence or consent is not to be unreasonably withheld..."

This provision transforms strict prohibitions into conditional covenants, requiring landlords to act reasonably when considering requests for consent to assign or sublet.

Landlord and Tenant (Covenants) Act 1995

The Landlord and Tenant (Covenants) Act 1995 brought major changes to tenant liability post-assignment for leases after 1 January 1996:

  1. An assignor is automatically released from future liabilities upon assignment.
  2. The link between original landlord and tenant for future liabilities is removed.
  3. Authorised Guarantee Agreements (AGAs) ensure continued tenant liability post-assignment.

Assignment: Legal Principles and Practical Considerations

Assignment involves transferring the entire leasehold interest from the current tenant to a new tenant. Key legal principles include:

Landlord's Consent

  1. Absolute Prohibition: Rare and often unenforceable due to the Landlord and Tenant Act 1927.
  2. Qualified Consent: Requires landlord's consent, which must not be unreasonably withheld.
  3. Fully Qualified Consent: Consent must be provided both reasonably and promptly.

Example: In International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513, the court found a landlord's refusal to consent based solely on the assignee's country of incorporation to be unreasonable.

Authorised Guarantee Agreements (AGAs)

AGAs are important in current assignment practice:

  1. They allow landlords to have the outgoing tenant guarantee the incoming tenant's performance.
  2. AGAs must be limited to a single assignment.
  3. Terms cannot be more burdensome than the original lease obligations.

Case Study: In K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904, the Court of Appeal ruled "sub-guarantees" void as they violated anti-avoidance provisions.

Drafting Considerations for Assignment Clauses

When drafting assignment clauses, consider:

  1. Setting out clear criteria for the landlord's consent.
  2. Including AGAs, ensuring they meet statutory limits.
  3. Addressing consent processes, including timelines and documentation.
  4. Considering rights of first refusal for the landlord.

Subletting: Legal Framework and Strategic Considerations

Subletting creates a new lease by the tenant, who acts as an intermediate landlord to the subtenant.

Key Legal Principles

  1. Consent Requirements: As with assignments, consent for subletting is typically conditional.
  2. Overriding Lease: The main lease terms take precedence over the underlease.
  3. Privity of Contract: No direct contractual link exists between head landlord and subtenant.

Concurrent Leases

A concurrent lease allows the tenant to grant a lease of their entire interest for a term that is shorter than or equal to their own:

  1. The concurrent lessee becomes the immediate landlord of existing subtenants.
  2. The original tenant retains a reversionary interest.
  3. This structure is useful for estate management or as security.

Example: A 25-year tenant might issue a concurrent lease to a management company for 20 years, while retaining the final 5 years as a reversionary interest.

Drafting Considerations for Subletting Clauses

  1. Specify permitted and prohibited uses for sublet premises.
  2. Set rent levels, often requiring them to match market rates.
  3. Include approval of subtenant covenants and underlease form.
  4. Limit multiple layers of subletting to avoid complex structures.

Practical Application and Exam Relevance

For the SQE1 FLK2 exam, candidates should:

  1. Analyze scenarios involving assignment and subletting.
  2. Identify potential breaches of alienation clauses.
  3. Advise on drafting and negotiating alienation clauses in commercial leases.
  4. Understand interplay between statutory and contractual lease terms.

Exam-Focused Example: A commercial lease stipulates: "The tenant shall not assign, underlet, or part with possession of the whole or any part of the demised premises without the prior written consent of the landlord, such consent not to be unreasonably withheld."

Analyze if: a) A tenant sublets without seeking consent. b) The landlord refuses consent for an assignment to a financially sound company. c) A tenant proposes a concurrent lease for the entire term minus one day.

Conclusion

A thorough understanding of alienation clauses is essential for success in the SQE1 FLK2 exam and future legal practice. These provisions intersect property law, contract law, and commercial practice, requiring an understanding of:

  1. Statutory frameworks, including the relevant acts.
  2. Legal principles on assignment and subletting, including reasonable consent.
  3. The role and rules of Authorised Guarantee Agreements (AGAs).
  4. Strategic use of concurrent leases.
  5. Practical aspects in drafting and negotiating alienation clauses.

Candidates who are familiar with these subjects will be equipped to handle complex leasehold transactions and offer informed legal guidance.