Acquiring an Existing Lease of Real Estate Commercial A Pain in the Assignment?

25th September 2015 Commercial

You may have found the perfect premises for your business only to discover that the right of occupation will be by way of the transfer (or 'assignment' in legal terminology) by the outgoing tenant of an existing lease. In such circumstances, if the grant of a new lease direct from the landlord is not an option and the landlord is reluctant to agree to any variation of the existing terms, there are a number of issues that a prudent tenant should consider.

Rent

You will be required to pay the rent at the current level determined by the lease and will not benefit from an initial rent free period that landlords are normally prepared to grant to tenants at the start of a new lease to offset costs such as fitting out the premises. In particular, it will be vital to check the lease for forthcoming rents reviews, which could be a nasty shock to your business plan if the passing rent is subject to a significant increase within the early period of your occupation.

Arrears

It will be important to ascertain that the outgoing tenant is fully up to date with all payments due to the landlord pursuant to the terms of the lease. This may include not only the passing rent but also additional items such as building insurance premiums, service charge payments, etc. It will usually be a condition of the landlord permitting the assignment of the lease that all payments are up to date but regardless you should ensure that you are not inheriting arrears of the outgoing tenant.

Repair and Alterations

The lease will contain obligations on the tenant to keep the premises in repair. Such obligations, particularly in leases for longer terms can be onerous and require the tenant to keep the premises in A1 condition throughout the life of the tenancy. If the outgoing tenant has failed to keep the property in good repair then you should consider the likely costs of putting the property in repair because you will become liable for any such repairs once the lease has been assigned to you.

Another point to consider is whether any alterations have been made to the premises by a tenant since the commencement of the existing lease. The lease will usually oblige the tenant to reinstate any such alterations at the end of the contractual term, if so required by the landlord. Where extensive alterations of this nature have occurred, the costs of reinstating and making good the premises could be considerable.

Landlord's Consent

Even though you will not be entering into a new lease with the landlord, in most cases the landlord will still need to be involved in the assignment process. This is because almost all real estate commercial leases are drafted on the basis that the landlord's consent is required to assign the lease to a new tenant. The lease will usually provide that the landlord's consent is not to be unreasonably withheld or delayed but the landlord can attach conditions to the granting of such consent. You should be prepared for the landlord to (a) insist upon conditions such as a rent deposit and/or personal guarantees, (b) require that the landlord's legal and administrative costs be paid and (c) for the assignment process to take a number of weeks.

Use

Most commercial leases contain clauses which limit the use of the premises to a particular use or group of uses and/or prohibit certain uses. It will be important to ascertain whether or not your proposed use falls within the scope of what is permitted by the lease. If not, an approach will need to be made to the landlord to see if they will agree to vary the terms of the lease. You must also be sure to check the existing planning permission for the property to ensure that your proposed use is a lawful one. If a new planning permission is required then an application to the local planning authority will be necessary. In those circumstances it would be prudent to make any deal to acquire the property conditional upon any requisite planning consent being obtained.

The above are just some of the issues that need to be considered when contemplating taking an assignment of an existing lease of commercial premises. It is vital to seek legal advice at the earliest opportunity and have the lease checked by a suitably experienced solicitor. As in most walks of life the motto 'fail to prepare, then prepare to fail' applies here. Only the foolhardy would commit themselves to accepting legal obligations without first taking the time to discover any nasty surprises that may be lurking within the pages of the lease document!

For more information, or to discuss a similar issue please do get in touch via email.

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Thomas Pearson is a Partner located in Manchesterin our Real Estate Commercial department

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