The tough economic situation over the last couple of years has inevitably led to some rationalisation. In some cases, this can involve consolidating the balance sheets of two companies in the same group. This often means the legal transfer of real estate property interests from one company to another.
One particularly thorny area is transferring (or assigning) a lease from one to another. Before we look at the options for companies, let’s first understand the issues at stake.
The legislative background to assigning a lease
There are various layers of rules that govern the assignment of leases. The first thing is the lease itself, specifically the alienation provisions. These should set out whether the transfer (assignment) of a lease is permitted at all. If it is, they should cover when the landlord’s consent is required and in what circumstances the landlord can lawfully withhold consent. In addition, the lease will usually set out what other conditions may need to be met first.
The provisions of the lease should be read alongside the provisions of the Landlord and Tenant Act 1927 which amongst other things implies that where the landlord’s consent is required, the Landlord’s consent cannot be unreasonably withheld. In addition the provisions of the Landlord and Tenant Act 1988 adds another layer of statutory duties on the Landlord, including to give consent, except where it is reasonable not to do so, to give consent within a reasonable time and to give the tenant written notice of its decision.
The legal background as to when a tenant is released from the tenant covenants under the lease, is contained in the Landlord and Tenant (Covenants) Act 1995.
This aims to ensure that when a lease is assigned to a new tenant and the landlord has given their consent (if it is required), the original tenant is released from their future obligations under the lease. To protect landlords when this happens, the landlord can require the original tenant to give an authorised guarantee agreement (AGA). This means the original or outgoing tenant (the assignor) guarantees the obligations of its immediate successor, the assignee.
Test cases highlight the problems in inter-group property lease transfers
Effectively, on an assignment with consent the assignor is released from their tenant covenants. Where there is a guarantor (which can often be a parent company) the Court of Appeal confirmed that the guarantor is also released. The guarantor can neither be required nor offer to be a guarantor for the assignee even if it is a group company.
This leaves landlords unprotected because they are unable to retain the covenant strength of a parent company as direct guarantor.
A guarantor can still be a guarantor under an AGA (colloquially called a “GAGA”), but quite often in a consolidation scenario the assignor is to be wound up. Therefore, it makes no sense for the assignor to offer or agree to an AGA. This means that, where in a group restructuring it might otherwise seem sensible to approach a landlord (where consent is required) and offer the same parent company guarantee as is currently in place, this is not permitted, regardless of what the lease says.
Following test cases, many leases restrict or prohibit inter-group assignments to protect landlords’ security for this very reason. However, in practice, it makes it very difficult for businesses to assign a lease to a different group company.
How can businesses wanting to assign a new inter-group tenant get round this?
What are the alternatives for a tenant wanting to assign within the group, in the knowledge that the landlord is likely to want security for the tenant’s obligations?
The parties might consider the following options, none of which are perfect:
- Offer a different guarantor, although this is not always possible and depends on the structure of the group.
- Offer a rent deposit, although this impacts on cash flow as the money is locked up for the period of the lease or at least until the release threshold is achieved.
- Surrender the current lease and start with a new lease. This is perhaps the simplest option, particularly if the assignor is to be wound up and is not going to give an AGA. However, there would be stamp duty land tax to pay as the new lease would be taken in a different entity and so overlap relief would not be available.
The post pandemic economic pressures mean that landlords and tenants alike may need to consider restructuring their assets to ensure maximum financial efficiency. The legislative framework of the Landlord and Tenant Act 1995 should not be overlooked when proposals are being implemented and although a straight inter-company lease assignment may not be possible, there are other ways in which the objective can be achieved.