Leasehold real estate law and practice - Licence to assign a...

Learning Outcomes

This article covers licences to assign and underlet in leasehold real estate practice, including:

• The legal function of licences, when consent is required, and how to seek it
• Statutory duties under the Landlord and Tenant Acts 1927 and 1988, response timeframes, and written reasons
• Distinguishing assignment from underletting and their impact on privity of contract and privity of estate
• The position under “old” (pre-1996) and “new” leases, and the role and limits of Authorised Guarantee Agreements (AGAs)
• Typical licence conditions, lawful s19(1A) pre-agreed conditions, and the reasonableness of withholding or delaying consent
• Consequences of proceeding without consent, including forfeiture risk, damages, and practical effects on underleases
• Drafting and advising points: licence form, timing, costs, references, notices, and longstop/voidability provisions
• Interaction with security of tenure under the 1954 Act (contracting out) and mirroring headlease covenants
• Contractual context under SC and SCPC where completion depends on consent, and available remedies

SQE2 Syllabus

For SQE2, you are required to understand the practical and legal framework for assignments and underlettings of leasehold estates, with a focus on the following syllabus points:

• understanding key procedures for assignment and underletting of a lease
• understanding the role and function of landlord’s consent, including the legal and statutory framework
• understanding the practical and statutory requirements for a valid licence to assign or underlet
• understanding how disputes arise and are resolved over assignment and underletting
• drafting, reviewing, and advising on conditions commonly found in licences to assign or underlet
• comparing the enforceability of covenants relating to assignment and underletting
• advising clients—landlord or tenant—on consent disputes and remedies for breach

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 main legal effect of a landlord granting a licence to assign?
2. True or false? A tenant may assign or underlet their lease without landlord consent unless the lease expressly restricts this.
3. What statutory duties must a landlord comply with when considering a request for assignment or underletting?
4. What are the legal consequences if a tenant assigns without obtaining a required licence to assign?

Introduction

When a tenant wishes to transfer their lease (assignment) or grant a new lease out of their existing lease (underletting or subletting), the terms of the head lease will generally dictate what is required for the transaction to be lawful. In most modern leases, assignment and underletting are subject to restrictions, the most common being that the tenant must obtain the landlord’s consent—usually by securing a formal licence to assign or underlet. In practice and for SQE2, understanding the requirements for these licences, their enforceability, statutory overlay, and practical drafting or advice points is essential.

Key Term: licence to assign
A landlord’s formal written consent, usually by deed, authorising the tenant to transfer (assign) their leasehold interest to a third party.

Key Term: licence to underlet
The landlord’s formal consent allowing the tenant to grant a further lease out of their original lease, usually for a part or all of the property, to a subtenant.

Most leases regulate alienation using three forms of covenant:

• Absolute (prohibiting assignment or underletting under any circumstance).
• Qualified (allowing assignment or underletting only with the landlord’s consent).
• Fully qualified (as above, and expressly requiring that consent not be unreasonably withheld or delayed).

Key Term: qualified covenant
A lease provision allowing a disposal only with landlord’s consent, without an express “reasonableness” stipulation (statutory modification applies).

Key Term: fully qualified covenant
A lease provision allowing a disposal only with landlord’s consent and expressly stating that consent must not be unreasonably withheld or delayed.

Key Term: assignment
The transfer of a tenant’s existing leasehold interest to a third party (the assignee), who takes over the tenant’s obligations for the remainder of the term.

Key Term: underletting (subletting)
Grant by a tenant of a new lease out of their own lease, to a subtenant, for a term shorter than the original lease.

Key Term: privity of contract
The contractual relationship binding parties to their promises; relevant to “old leases” (pre-1996) and direct covenants in licences.

Key Term: privity of estate
The proprietary relationship between landlord and current tenant; binds assignees while the lease is vested in them.

Key Term: Authorised Guarantee Agreement (AGA)
An agreement (usually by deed) in which the outgoing tenant guarantees the assignee’s performance of the lease covenants after an assignment, often required as a licence condition in leases granted since 1996.

The Structure and Purpose of Licence to Assign and Underlet

Restrictive Covenants—Assignment and Underletting

Most commercial leases include covenants limiting the tenant’s rights to dispose of or share possession of the leasehold property. These covenants are typically:

• Absolute (prohibiting assignment or underletting under any circumstance).
• Qualified (allowing assignment or underletting only with the landlord’s consent, not to be unreasonably withheld).
• Fully qualified (as above, and expressly requiring that consent not be unreasonably withheld or delayed).

Section 19(1) of the Landlord and Tenant Act 1927 upgrades most qualified covenants against assignment, underletting, charging or parting with possession to fully qualified covenants by importing a requirement that consent “is not to be unreasonably withheld.” In addition, section 19(1A) LTA 1927 allows parties to agree, in advance (for non-residential leases granted since 1 January 1996), specific circumstances in which consent may be withheld and conditions subject to which consent may be given—these agreed circumstances/conditions are not subject to the statutory “reasonableness” test. Common examples include an AGA requirement and financial security measures such as a rent deposit.

Why Are Licences Needed?

A licence to assign or underlet is required when the lease restricts dealings to cases where the landlord’s consent has been granted in writing. Granting or refusing such a licence has major implications for both parties:

• The tenant needs to ensure their transaction is valid and does not risk forfeiture.
• The landlord retains control over incoming tenants and the use of the property, protecting the investment.

Proceeding without required consent will normally constitute a breach of covenant. An unlawful assignment or underletting exposes the tenant to forfeiture (subject to relief) and damages; it may also affect the validity of the sublease as against the landlord.

Legal and Statutory Framework

The legal relationship for assignment or underletting is first set by the lease terms, and then overlaid with statutory duties:

• Section 19 of the Landlord and Tenant Act 1927 upgrades most qualified covenants to require that consent to assign or underlet “is not to be unreasonably withheld.”
• The Landlord and Tenant Act 1988 imposes a statutory duty on landlords who receive a written application for consent:
  • To give consent within a reasonable time, unless it is reasonable to refuse.
  • To notify the tenant in writing of the decision and any reasons for refusal, and any conditions on which consent is given.
  • To exercise the duty owed to the tenant (and sometimes to others such as guarantors) with reasonable care; breach can lead to damages.

Case law suggests that around 28 days is generally a reasonable period to respond to a properly supported application, depending on the circumstances. What is “reasonable” will depend on the complexity of the proposed transaction and the information provided.

If the lease is silent on alienation, the tenant may freely assign or underlet, but this is rare in modern practice.

Reasonableness—Typical Landlord Concerns

In assessing reasonableness, landlords may take into account concerns that are relevant to the landlord-tenant relationship and the property’s use, such as:

• Inadequate covenant strength or unsatisfactory references of the proposed assignee/subtenant.
• A proposed use that would breach, or be likely to lead to breach of, user covenants or planning laws.
• Conflict with a tenant-mix policy operating for a shopping centre or estate (where properly substantiated).
• Transactions at a rent far below market value (for sublettings).
• Existing tenant breaches that the landlord reasonably requires to be remedied before consenting.

Refusal for arbitrary, discriminatory, or extraneous reasons unrelated to the property and the lease relationship will be unreasonable.

Worked Example 1.1

Question: Nina is a tenant under a fifteen-year commercial lease. The lease says, “The tenant shall not assign or underlet the whole or any part of the premises without the prior written consent of the landlord, which is not to be unreasonably withheld.” Nina wishes to assign the lease to Rachel, a new business owner. What must Nina do?

Answer:
Nina must request written consent from the landlord before assigning. The landlord must consider the request and communicate consent or reasonable refusal—in writing—within a reasonable time. If the landlord refuses consent, reasons must be given, and refusal cannot be arbitrary. Without the licence to assign, any transfer would breach the lease, risking forfeiture.

Landlord's Duties, Process, and Statutory Requirements

Landlord’s Decision-Making Responsibilities

When a tenant applies for consent to assign or underlet, the landlord must act as follows:

• Respond within a reasonable time. Case law commonly treats about 28 days as a benchmark for a straightforward, fully supported application, though complexity or missing information can justify longer.
• Consent must not be unreasonably withheld or delayed.
• If consent is refused, reasons must be specified in writing. These must be genuine, connected to the landlord-tenant relationship and the intended use; refusal cannot be arbitrary or discriminatory.
• Consent may be granted subject to reasonable conditions (such as providing references, a rent deposit, or—for assignment of “new” leases—an AGA where reasonable or contractually required).
• The landlord cannot demand a fine or premium for consent unless the lease expressly permits it. Reasonable legal and professional costs associated with considering and documenting the licence can be recovered.

Failure to comply with these statutory requirements exposes the landlord to a damages claim. A tenant may also seek declaratory relief that consent has been unreasonably withheld.

Form of the Licence

Consent must be conveyed by a formal written licence—ideally by deed. It should specify:

• The transaction authorised (assignment or underletting), the parties and the property.
• Any conditions imposed (e.g., requirement for the underlease to mirror headlease covenants; requirement for AGA; rent deposit; bank or parent company guarantee).
• A time limit within which the authorised transaction must complete (with the licence voidable if completion does not occur).
• An obligation to serve formal notice of the assignment/underlease on the landlord within a specified period and to pay any registration fee stated in the lease.
• Costs responsibility (often, tenants must pay the landlord's reasonable legal and professional fees for granting the licence, typically supported by a solicitor’s undertaking).

Including a longstop date for completion and a voidability clause protects the landlord against stale consent. To avoid inadvertent consent, landlords should avoid informal communications which might amount to consent despite “subject to contract” wording.

Worked Example 1.2

Question: A landlord grants consent to underlet conditioned upon the tenant obtaining the landlord’s approval of the draft underlease, and upon the underlease excluding statutory “security of tenure.” The tenant later underlets without these conditions being met. Is the underletting valid?

Answer:
The underletting breaches the licence because the conditions were not complied with. The landlord may be entitled to treat this as an unlawful underletting (a breach), potentially leading to forfeiture or damages.

Assignment and Underletting—Old and New Leases

• Old leases (granted before 1 January 1996): privity of contract means the original tenant remains liable for lease covenants for the duration of the term, even after a lawful assignment. Landlords often require a direct covenant from the assignee to observe tenant covenants for the remainder of the term (contained in the licence to assign).
• New leases (granted on or after 1 January 1996): on lawful assignment, the outgoing tenant is automatically released from covenants; landlords may require an AGA from the outgoing tenant to guarantee the immediate assignee’s performance until the next lawful assignment. Any direct covenant by the assignee should be limited to the period whilst the lease is vested in the assignee.

Worked Example 1.3

Question: A lease was granted in 2006 (a “new lease”). The outgoing tenant seeks consent to assign to a modestly capitalised assignee. The lease contains a pre-agreed condition (under s19(1A) LTA 1927) that the outgoing tenant must provide an AGA on assignment. The tenant queries if the landlord can insist on the AGA.

Answer:
Yes. Because the lease contains a valid s19(1A) condition, the landlord may require an AGA as a condition of consenting—without needing to prove separate reasonableness. Absent a s19(1A) clause, an AGA can still be required if reasonable in all the circumstances.

Reasonableness—Examples

The following illustrate when withholding consent may be reasonable:

• Where reliable financial information and references are not provided, or reveal weak covenant strength.
• Where the proposed assignee’s intended use is likely to breach a user covenant or planning requirements.
• Where the proposed assignment would disrupt a reasonable, established tenant-mix policy in a shopping centre or estate, demonstrably harming investment value.
• Where outstanding tenant breaches remain unremedied (e.g., rent arrears or repair).

By contrast, refusal based on irrelevant factors (e.g., personal dislike, discrimination, an attempt to secure unrelated advantages) is unreasonable.

Worked Example 1.4

Question: A shopping centre lease restricts use to “fashion retail.” The landlord operates a documented tenant-mix policy to avoid duplicate uses. The tenant proposes to assign to a retailer whose use would duplicate several existing offerings, increasing vacancy risk elsewhere. The landlord refuses consent with reasons referring to the policy and investment impact. Is that likely reasonable?

Answer:
Yes, it is likely reasonable where the tenant-mix policy is genuine, documented, and rationally applied, and the landlord’s refusal is connected to protecting the investment and the property’s overall use, not arbitrary or discriminatory.

Security of Tenure—Underletting

Underleases of business premises will often be required to be “contracted out” of Part II of the Landlord and Tenant Act 1954 using the prescribed notice and declaration process before the underlease is entered into. Landlords commonly condition consent on evidence that the procedure has been correctly followed. Failure to contract out where required can give the undertenant statutory renewal rights, disrupting control of the reversion.

Consequences of Proceeding Without Consent

If a tenant assigns or underlets without required consent, the disposal will usually amount to a breach of covenant. For assignment, the transfer may be valid as between tenant and assignee, but the landlord can:

• Serve a section 146 LPA 1925 notice (for breaches other than non-payment of rent), specifying the breach and requiring remedy where possible.
• Forfeit the lease (subject to relief), if the lease contains a right of re-entry and the breach is not remedied.
• Claim damages and/or seek injunctive relief.

Underlettings in breach may result in the underlease being vulnerable to the head landlord’s enforcement and practical difficulties for the undertenant if the headlease is forfeited.

Worked Example 1.5

Question: A tenant underlets part of the premises without consent where the lease prohibits underletting of part. The undertenant pays rent and occupies for a year. The landlord discovers the breach. What can the landlord do?

Answer:
The landlord may serve a section 146 notice for breach of the alienation covenant and seek forfeiture if the breach is not remedied (e.g., by surrendering the underlease). The landlord can also claim damages for any loss caused. The underlease may persist as between tenant and undertenant, but it will be precarious if the headlease is forfeited.

Drafting and Practice Points

Precedent Clauses

A licence to assign or underlet should set out:

• The parties and property.
• The precise transaction being consented to.
• Confirmation that the landlord’s consent is given (for a specified period or transaction).
• Conditions of the licence (such as provision of an AGA, deposit, or specific form of underlease).
• Covenants by the assignee or subtenant to comply with head lease covenants (for underleases, “so far as they relate to the property” and often excluding the covenant to pay rent under the headlease).
• Notice requirements post-completion (e.g., to serve notice of assignment/underlease within a specified period and pay any registration fee).
• Costs responsibility (often, tenants must pay the landlord's reasonable legal and professional fees for granting the licence).

Strategic inclusions:

• A longstop date with licence voidable if completion does not occur.
• A statement that nothing in communications constitutes consent unless and until the licence is executed (to avoid inadvertent consent).

Strategic Considerations

• Absolute prohibitions on assignment or underletting are rare—practically, they may be challengeable by negotiation.
• Always review the lease and conditions carefully before advising on assignment or underletting.
• Apply for consent with a full pack (details of the proposed assignee/undertenant, business plan, accounts, references, proposed documentation). Incomplete applications can justify longer response times.
• If a transaction occurs without a required licence, it will usually be void or voidable as against the landlord and constitute a breach of covenant.

Remedies for Breach

• If a tenant assigns or underlets without required consent, the landlord may:
  • Seek to forfeit the lease (subject to relief).
  • Claim damages for breach.
• Where rent arrears are involved alongside alienation breaches, landlords may also consider commercial rent recovery routes or action against guarantors/rent deposits per the lease and any rent deposit deed.
• Under “old leases,” recovery from former tenants and their guarantors may be possible using section 17 LT(C)A 1995 for fixed sums (e.g., rent and service charge), served within six months of due date, with potential for an overriding lease.

Contractual Context—SC v SCPC

Assignments often proceed under contracts incorporating either the Standard Conditions of Sale (SC) or the Standard Commercial Property Conditions (SCPC). Where completion is conditional on landlord’s consent:

• Under SC: either party may rescind by written notice if consent has not been given three working days before the completion date, or if given subject to a condition to which a party reasonably objects.
• Under SCPC: if consent has not been obtained by the completion date, completion is postponed until five working days after the assignor notifies the buyer that consent has been given or a court declares refusal unreasonable; contract may not be rescinded until six months after the original completion date if consent is still outstanding.

Worked Example 1.6

Question: A contract for assignment incorporates SCPC unamended. Landlord’s consent has not arrived by the completion date, and there has been no unreasonable delay by the landlord. What happens?

Answer:
Under SCPC, completion is postponed. The assignor must notify the buyer when consent is given; completion then takes place five working days later. If six months elapse from the original completion date without consent or a court declaration, either party may rescind by written notice.

Practical Tips for Applications

• Submit a clear written application to trigger the LTA 1988 duties, enclosing all relevant information (financials, references, details of proposed use, draft assignment or underlease).
• State any time sensitivity and propose a reasonable timetable for decisions.
• Include any lender’s consent if required by the landlord’s mortgage or the lease (landlord may need to seek its mortgagee’s consent).
• Ensure the proposed underlease mirrors key headlease covenants and complies with any specific requirements (e.g., minimum rent, no underletting of part, contracted-out status under the 1954 Act).
• Obtain undertakings for the landlord’s reasonable legal and professional fees—often payable whether or not consent is ultimately granted.

Exam Warning

For SQE2, always check if the consent requirement has statutory overlay. Never advise a client to proceed with assignment or underletting without landlord’s written consent if required by the lease—even if consent appears “automatic.” Failure to comply risks forfeiture and damages.

Revision Tip

In a scenario, always establish whether the lease restriction is absolute, qualified, or fully qualified, as this determines whether consent is required and if statutory duties apply.

Summary

A licence to assign or underlet is the landlord’s formal written consent—usually by deed—for the tenant to assign or sublet. In all modern commercial leases, such transactions are only allowed with landlord’s prior written consent, which the landlord cannot unreasonably withhold or delay. Statutory duties overlay lease provisions—requiring decisions, notices, and reasons in writing. Failure to observe these principles exposes the defaulting party to penalties, forfeiture, or damages. For assignments, “old leases” retain privity of contract; “new leases” permit automatic release of the outgoing tenant but often require an AGA. Underlettings must mirror key headlease covenants and commonly be contracted out of the 1954 Act.

Key Point Checklist

This article has covered the following key knowledge points:

• Assignment transfers an existing lease, while underletting creates a new lease out of the tenant’s own.
• Leases almost always require landlord’s prior written consent for assignment or underletting; this consent is formalised in a licence to assign or underlet.
• Statutory overlay (mainly Landlord and Tenant Acts 1927 and 1988) means landlords must give prompt, reasoned decisions in writing and cannot withhold consent unreasonably.
• Reasonable refusal can include poor covenant strength, likely breach of user covenants, or conflict with a genuine tenant-mix policy; arbitrary reasons are unlawful.
• Licences to assign and underlet typically stipulate the precise transaction, timing, and conditions (AGA, deposit, underlease form, contracted-out status); avoid informal consent.
• “Old leases” retain privity of contract after assignment; “new leases” release outgoing tenants but permit AGAs to guarantee immediate assignees.
• Assigning or underletting without required consent is a serious breach; landlord remedies include forfeiture or damages, and fixed-charge recovery under s17 LT(C)A 1995 in appropriate cases.
• Contract conditions (SC/SCPC) dictate what happens if consent is outstanding near completion—know the differences on rescission/postponement.
• Underleases should mirror headlease covenants and frequently be contracted out of the 1954 Act; check any “no underletting of part” restriction.
• The form and content of the licence have commercial and legal significance—always check the lease and statutory regime and submit complete applications to trigger LTA 1988 duties.

Key Terms and Concepts

• licence to assign
• licence to underlet
• assignment
• underletting (subletting)
• Authorised Guarantee Agreement (AGA)
• privity of contract
• privity of estate
• qualified covenant
• fully qualified covenant