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Procedural steps for the assignment of a lease - Coggle Diagram
Procedural steps for the assignment of a lease
definition of assignment
An assignment is the transfer of an existing lease from the current tenant (assignor/seller) to a new party (assignee/buyer).
The procedure
resembles that of a freehold property transfer
, but includes
unique aspects specific to leaseholds.
key differences with with freehold sale
existence of lease
the terms of the lease are already in place and typically non-negotiable.
The assignee's solicitor must check that the lease terms suit the assignee’s requirements.
While changes to the lease terms are theoretically possible, they require the landlord’s consent, which is granted at their absolute discretion.
landlords consent
Assignments of commercial property leases usually require the landlord’s consent, a critical procedural difference from freehold transactions.
purchase price
-For leases where the tenant pays market rent, there may be no premium (purchase price) for the lease.
If a premium is payable, it is often a modest amount, reflecting the limited capital value of such leases.
landlord's consent
requirement for consent
commercial property leases usually provide requirement for landlords consent to be obtained prior to any assignment
It is the assignor’s duty to apply for consent, using reasonable efforts to obtain it, but both the assignor and assignee must actively participate.
licence to assign
The landlord’s consent is formalised in a
licence to assign, finalised at or before completion.
Pre-Exchange Stage:
The assignor must confirm that the landlord agrees to the assignment in principle.
The landlord often requires references to assess the assignee’s financial standing and reliability.
current landlord, bank, employer, prof person e.g. accountant/solicitor, person/company who regularly trade with, 3 years audited accounts (if assignee company, self-employed or partnership)
costs & undertakings
Assignor’s Solicitor:
The landlord’s solicitor typically requires an
undertaking
for legal and professional costs for the proposed assignment and licence to assign
This undertaking must be:
Authorised by the assignor.
Limited to reasonable costs (a cap is advisable).
Solicitors often request an upfront payment from the assignor to cover these costs before giving the costs undertaking
additional requirements
Guarantors or Guarantees:
The landlord may require:
A
guarantor
for the assignee.
An authorised guarantee agreement (
AGA
) from the assignor, ensuring the assignee fulfills tenant covenants.
Premiums
: landlord typically cannot demand a payment (known as a "premium") from the assignor in exchange for granting this consent.
timing & contractual provisions
timing of consent
Consent must be granted
before or upon completion
of the assignment.
Without consent, the assignor risks breaching the lease’s assignment covenant.
standard conditions (SCs)
If the landlord’s consent is
not obtained 3 working days before completion/ consent given subject to condition buyer reasonably objects to,
either party may
rescind
the contract by notice
standard commercial property conditions (SCPCs)
If consent is delayed, c
ompletion is postponed for up to 5 working days after notice
that consent has been granted.
Either party can
rescind
the contract via notice
after 6 months
if consent remains outstanding
licence to assign
purpose of a licence
Consent for Assignment:
The landlord grants permission for the tenant (assignor) to transfer the lease to another party (assignee).
Avoid Breach of Covenants:
Without this consent, the assignor
could breach the tenant’s alienation covenants
in the lease. This could lead to:
The assignor remaining liable for tenant obligations.
The landlord having the right to forfeit (terminate) the lease.
protects the landlord's interests while enabling the transfer of lease obligations.
drafting & parties involved
Drafting
:
The landlord's solicitor prepares the draft and sends it to the assignor’s solicitor, who liaises with the assignee’s solicitor to finalise it.
Parties
:
The landlord, assignor, and assignee must all sign the document, often in
triplicate
so each party retains a copy.
Guarantors
: If required, guarantors of the assignor or assignee must also sign.
key provisions in a licence to assign
(a) Landlord's Consent:
Allows the assignor to assign the lease to the assignee, often within a set time frame (e.g., 3 months) to account for possible changes in the assignee's financial position.
(b) Authorised Guarantee Agreement (AGA):
For l
eases granted on or after 1 January 1996 (new leases)
, the assignor typically provides an AGA, guaranteeing the assignee’s compliance with the lease.
The assignee is automatically released from liability once they assign the lease (their term ends).
The landlord cannot hold the assignee liable for breaches occurring after they assign the lease, no recourse. To compensate for this limitation, landlord may require the assignor (original tenant) to sign an authorised guarantee agreement (AGA).
(c) Direct Covenant:
For l
eases granted before 1 January 1996
(old leases),
the assignee must directly promise the landlord to perform the lease obligations for the remainder of the term.
The assignee is liable under privity of estate for lease obligations only while they hold the lease.
(d) Costs:
The assignor agrees to cover the landlord's legal and professional fees for preparing the licence.
AGA
Purpose
: To guarantee the assignee’s obligations for new leases (when OG asignee assigns lease to incoming asignee).
Conditions
:
Mandatory if specified in the lease.
If not specified, required only if reasonable.
Assignor’s Obligations in an AGA
:
(a)
Guarantee
: Ensure the assignee complies with lease terms, including rent payment.
(b)
Performance
: Fulfill obligations if the assignee defaults.
(c)
Indemnity
: Reimburse the landlord for losses caused by the assignee.
(d)
New Lease:
Take on a new lease if the assignee's lease is disclaimed due to insolvency.
Limitation
: The assignor’s liability under an AGA ends once the assignee is released from the lease (e.g., after assigning it further).
deduction & investigation of title
general duties of assignors solicitor
Investigate Leasehold Title:
Verify the leasehold title to ensure there are no undisclosed issues, such as restrictive covenants or easements that may affect the lease.
Check Superior Freehold Title:
Examine the superior freehold title, as its covenants or easements may also bind the leasehold interest.
Disclose Issues:
Identify potential problems and disclose all relevant incumbrances in the draft contract.
Provide Documents:
Supply the assignee's solicitor with:
A copy of the lease.
Licences permitting assignment to the current or previous tenants.
deduction of superior freehold title
Whether the freehold title should also be deduced
depends on the leasehold title’s registration status:
(a) Registered Leasehold with Absolute Title
Absolute Title: Guarantees the lease’s validity and title by the Land Registry.
No Freehold Deduction Needed
: The assignee’s solicitor need not investigate the superior freehold title.
(b) Registered Leasehold with Good Leasehold Title
Good Leasehold Title: Ensures the lease is valid but does not guarantee the freehold title.
-
Freehold Deduction Preferred:
The assignee (or their lender) may require the deduction of the freehold title to ensure the lease is sound.
If the freehold is registered, either party can search the title using open register rules.
If the freehold is unregistered, it must be deduced using the process for unregistered land (e.g., providing title deeds).
Special Condition: The contract must include a specific clause for deduction of the freehold title because it is not required under standard conditions of sale.
(c) Unregistered Leasehold
Entitlement to Lease Documents:
The assignee is entitled to:
The lease itself.
Assignments of the lease from the past 15 years.
Freehold Deduction Preferred
:
Without deduction of the freehold, the assignee will only obtain a
good
leasehold title upon registration.
This may be unacceptable to the assignee or a lender unless the freehold title is already registered with absolute title.
Search or Deduction:
If the freehold is registered, a search can be made under open register rules.
If the freehold is unregistered, deduction follows unregistered land procedures, as outlined in conveyancing guidelines.
Special Condition: As with good leasehold title, the contract must include a clause for deduction of the freehold title.
assignees solicitors responsibiltieis
Draft Contract Terms:
Ensure compliance with legal requirements and client needs.
Lease Terms:
Verify the following:
Length of Remaining Term
: Ensure it is sufficient for the assignee’s needs or lender requirements.
Permitted Use
: Confirm the property can be used as intended.
R
ent and Obligations
: Check the rent and other tenant covenants are acceptable.
Landlord’s Consent
: Determine whether the lease requires the landlord’s consent to the assignment and confirm it has been or will be obtained.
pre-contract enquiries & searches
asignees s should make
same searches & enquiries as for purchase of freehold
survey & personal inspection
local authority search
waters & drainage
pre-contract enquiries
environmental
flood search
lease- specific enquiries
assigness s should also ask to see
insurance policy for property
&
receipt for last insurance premium due
as breaches of assignor could become asignees liability
If only a
short period remains on the lease
, the assignee might choose not to carry out all searches or enquiries
risk does not justify cost
deed of assignment & covenants for life
purpose of deed of assignment
The deed of assignment is used to
transfer legal title to a leasehold interest in land
. It is required to be executed as a deed to comply with legal formalities under the LPA 1925
For
registered
leases, the prescribed form is
Form TR1.
For
unregistered
leases, a
deed of assignment
is used unless the lease is for
more than 7 years
, in which case compulsory first registration is triggered, and a
TR1 is recommended.
covenants for title
When a lease is assigned (sold with full/limited title guarantee), covenants for title are implied unless explicitly modified.
These covenants
promise that the assignor has fulfilled their obligations under the lease.
covenants:
Risk of Assignor Liability:
If the assignor has breached any tenant covenants (e.g., repair obligations), they could be liable to the assignee after the assignment because of these covenants.
Caveat Emptor (Buyer Beware):
While the assignee is responsible for inspecting the physical state of the property, the assignor can protect themselves by modifying the covenants for title to exclude repair obligations.
modifiication of covenants for title
To avoid post-assignment liability for repair, the following clause can be added to the transfer deed
(e.g., in Panel 9 or 11- additional provisions of a TR1):
"The covenants set out in section 4 of the Law of Property (Miscellaneous Provisions) Act 1994 will not extend to any breach of the tenant’s covenants in the lease relating to the physical state of the property."
This ensures the assignor is not liable for physical defects in the property post-assignment.
indemnity
old leases
implied indemnity
When an
old lease is assigned,
the law implies an indemnity covenant
from the assignee to the assignor.
This means that if the landlord enforces any tenant obligations against the assignor,
the assignor can recover the cost from the assignee
(who is actually in occupation of the property and responsible for the lease at the time).
exceptions for unregistered leases
If the lease is
unregistered
and no value is given for the transaction (e.g., a
gift
or transfer without payment),
the law does not imply an indemnity covenant.
In such cases, an
express indemnity covenant
(explicitly written into the transfer deed) will be
required
to ensure the assignor is protected.
standard conditions
SCPC and SCS provide for an express indemnity covenant to be included in the transfer deed if required by the contract.
new leases
Automatic Release:
When a lease is assigned, the
assignor is automatically released from liability for breaches occurring after the assignment
.
This makes an
indemnity generally unnecessary.
Exceptions
– Assignor Liability via an AGA:
= If the assignor enters into
AGA
(committing to guarantee the assignee’s compliance with lease obligations), they may still face potential liability for the assignee’s actions.
To protect the assignor, an
express indemnity
covenant from the assignee to the assignor should be included in the transfer deed.
This allows the assignor to recover any losses caused by the assignee’s default.
standard conditions
SCPC and SCS provide for an express indemnity covenant to be included in the transfer deed if required by the contract.
By including indemnities in the transfer deed, t
he assignor can protect themselves from ongoing liability and ensure the assignee is fully responsible for the lease obligations.
pre-completion formaltiies
pre-completion searches
(a) Registered Lease
An
OS1
search is conducted on the leasehold title at the Land Registry.
Purpose:
To check for any new entries on the title (e.g., charges or restrictions).
To
secure a priority period
(usually 30 working days), ensuring that the assignee's interest is protected upon registration.
(b) Unregistered Lease
A
land charges search
is conducted against the assignor's name.
Purpose:
To verify that no adverse entries (e.g., mortgages, restrictions) have been made since the initial pre-exchange search.
To confirm that the
15-working-day priority period
from the previous search covers the completion date.
(c) Company Search
If the
assignor or assignee is a company,
a company search ensures there are no issues like insolvency or lack of authority to enter into the transaction.
Circumstances for a company search:
To verify the company's legal status.
To ensure that the company has the power to execute the deed of assignment.
licence to assign
Role of the Landlord’s Solicitor:
Provides the
finalised (engrossed) licence documents.
These must be executed as a
deed
if they include covenants (e.g., assignee's promise to comply with lease terms).
Structure of the Licence:
Original Licence:
Executed by the landlord and handed to the assignor, who passes it to the assignee upon completion.
Counterpart Licence
: Signed by the assignee and returned to the landlord at completion.
additional provisions
if
AGA
is required, it may be included in the licence or created as a separate deed.
These documents only take effect upon completion of the assignment.
apportionments
When the lease is assigned, the financial responsibilities (e.g., rent, insurance premiums) are adjusted to reflect the change of tenant.
(a) Rent
Rent is usually
paid in advance by the assignor.
U
nless completion coincides with the rent payment date, the rent must be apportioned:
The assignee reimburses the assignor for the rent covering the period from completion to the next rent due date.
b) Other Outgoings
Similar apportionments may apply to other expenses, such as:
Insurance premiums.
Service charges or maintenance fees.
(c) Completion Statement
The assignor provides a completion statement detailing:
The amounts due for reimbursement.
The method of calculation.
Supporting documents (e.g., receipts or demands) are attached to verify the apportionments.
completion
1. payment by assignee
asignee pay assignore the balance of purchase price )if any) and any sums due under terms of assignment:
apportioned sum (rent, insurance
other agreed payments in completion statement
2. documents handed over by assignor
lease
transfer deed- TR1/deed of assignment
licence to assign
evidence of freehold title
discharge of mortgage (if rel e.g. if assignor used leasehold interest as security for a loan)
notice to landlord
insurance policy and receipt
-rent receipt
3. documents handed over by assignee:
money due- for outstanding sums per completion statemement
executed counterpart licence to assign
release of deposit (when premium paid for lease) and hand it over to assignor
4 . assigness legal assumptions
the assignee is entitled to assume that the rent has been paid and the tenant covenants (e.g., repair obligations) have been complied with, provided they produce the receipt for the last rent paid under the lease- dont need to investigate
5. assigneses solicitors role
inspect last rent paymenr recieptst and any apportioned outgoings to confirm they have paid and up to day
ensure all req docs provided by assignor
post-completion steps
SDLT/LTT payment
-
only payable on nay premium or purchase price charged by assignor
not payable on rent (as would have already been paid when lease initially granted)
The assignee must submit the relevant tax return (SDLT/LTT) and pay any tax due within 14 days (England) or 30 days (Wales) of completion.
registered leases
if lease already reg at LR, transfer must then be reg to update title to refelt assignees ownership
reg must occur within priorty period from pre-completion OS1 search
reg applies irrespective of time left on lease (even if less than 7 years)
leasehold title continues to exist in LR record until lease expires
unregistered leases
Registration Threshold:
Leases with
more than 7 years unexpired
must be registered
within 2 months
of the assignment. Failure to do so renders the legal estate void.
Application for Registration:
If the assignee has sufficient evidence of the superior freehold title, they can apply for a
bsolute leasehold title.
If evidence of the superior title is unavailable or incomplete, the assignee can o
nly obtain good leasehold title.
If the Lease Term is 7 Years or Less:
The
lease is not eligible for registration with a separate title but can still be noted or protected via other methods
, such as:
A c
aution against first registration
(if the freehold title is unregistered), ensuring the a
ssignee’s interest is protected against future dealings with the freehold title.
notice of assignment
if lease contains clause, must be given to
landlord
.
Procedure
:
Send the notice of assignment in duplicate, along with the fee specified in the lease.
Request that the landlord:
Signs and acknowledges receipt of one copy of the notice.
Returns the signed copy to the assignee.
Retain the receipted copy with the title deeds as proof of compliance.