Alienation is the general term given to the various ways in which the tenant might dispose of the Property: assignment, underletting, charging, parting with or sharing occupation or possession and holding it on trust for someone else.

Landlord’s objective:

• to control the identity of the tenant from time to time, to make sure that the rent will be paid and the investment value of the Property is maintained; but
• to avoid being so restrictive that it is impossible for the tenant to dispose of the Property.

Tenant’s objective:

• to maintain the maximum possible flexibility to dispose of the whole or part of the Property, if the tenant’s business requirements change.

General prohibition

In the absence of any express restrictions, the tenant will be free to deal with the Property as it chooses. The best way to make sure all methods of alienation are clearly dealt with is to include a general prohibition on all forms of dealing, except those expressly permitted by the lease. This is followed by a series of specific provisions setting out the circumstances in which various ways of dealing with the Property are allowed.

It is possible for the landlord to impose absolute restrictions on the various ways of disposing of the Property, without statute implying any duty to act reasonably. In practice, landlords should approach this with care, because too much control can make the lease so difficult to dispose of that the tenant can argue for a discount on rent review.

Assignment

Almost all commercial leases allow assignment of the whole with the landlord’s consent, which is not to be unreasonably withheld or delayed. If this is not allowed, the tenant has a good argument for a discount on rent review. The Landlord and Tenant (Covenants) Act 1995 (LTCA 1995) made significant changes to the way assignment clauses are operated and drafted. The tenant is released from its covenants on a lawful assignment but may be required to enter into an authorised guarantee agreement (AGA), to guarantee the performance of those covenants by the assignee. In addition, landlords now have the right to specify in the lease circumstances in which it will be reasonable to withhold consent and conditions that the landlord may reasonably impose when giving consent. Where such conditions and circumstances are to be determined by the landlord (for example whether or not the investment value of the Property will be adversely affected by the proposed assignment) they must either require the landlord to exercise its judgement reasonably or provide for determination by a third party.

When LTCA 1995 first came into force, leases were drafted with long lists of conditions and circumstances, including complex financial tests to be applied to proposed assignees. In general, practice has now moved towards shorter lists.

A typical set of circumstances in which consent may be refused would include:

• substantial outstanding breaches of covenant by the assigning tenant;
• the proposed assignee not, in the landlord’s reasonable opinion, being capable of complying with the tenant’s covenants;
• the proposed assignee being subject to diplomatic immunity;
• the proposed assignee being incorporated or resident in a country outside the UK with which the UK has no treaty for mutual enforcement of judgments; and
• (sometimes) the proposed assignee being a group company of the current tenant.

Of these, the group company exclusion is the most controversial. Landlords want it because they fear that it would otherwise be quite easy for a tenant with good covenant strength to assign a lease to a weaker group company, giving an AGA. If the lease was assigned again within the group, the original tenant would be released from its AGA and the landlord would be left with weaker group companies to rely on. Tenants will resist it, because it fetters their ability to move property around as part of group re-organisations. In practice, it is down to the bargaining strength of the parties, although there is a fairly strong tenant argument that a landlord should be able to resist an assignment to an unacceptable group company by applying the other tests, without imposing a blanket restriction on group company assignments.

A typical set of conditions that could be imposed on an assignment would include:

• the assigning tenant entering into an AGA and, if the tenant has a guarantor, the guarantor guaranteeing the AGA (see Guarantee provisions for further discussion of this);
• and if reasonably required by the landlord, the assignee providing an acceptable guarantor.

The Code recommends that a AGA should be required only if reasonable, although during the first 10 years’ operation of LCTA 1995, most leases have provided for an automatic AGA on all assignments. So far, the court has looked at this issue only in relation to the renewal of a pre-LTCA 1995 lease under LTA 1954, when it held that the new lease should provide for an AGA only where reasonable (Wallis Fashion Group Ltd v CGU Assurance Ltd [2000] 27 EG 145). A number of tenants have started to argue for this on new leases, so market practice may change.

Underletting

The usual position is for underletting of whole to be permitted with the landlord’s consent, which must not be unreasonably withheld or delayed. Landlords are more reluctant to allow underlettings of part, because of the perceived difficulties involved in managing a building with multiple occupiers. However, where the Property is easy to divide (particularly if it consists of more than one floor of a building), underlettings of defined “Permitted Parts” are often allowed.

Landlords need to keep some control over the terms of any underletting, for several reasons.

• Any rent agreed in relation to an underlease may be used as a comparable in a review of the head lease rent.
• If the underlease is not contracted out of the security of tenure provisions of LTA 1954, the underlease will continue if the undertenant remains in occupation. If the head tenant is not back in occupation at the end of head lease, that lease will come to an end and the undertenant will have a right to apply for a new tenancy. The court will take the terms of the underlease into account in settling the terms of any new lease.
• If the head lease is forfeited, the undertenant may apply for relief. While one would expect the undertenant to have to comply with the terms of the head lease, relief is granted at the court’s discretion and there is no guarantee that the court would not look at the terms of the underlease if they were very different.

Ideally, the landlord will want to make sure that the rent payable under the underlease is at least equal to the current market rent for the underlet property and that the terms of the underlease otherwise mirror those of the head lease. The tenant should also be required to make sure that the underlease is contracted out of the security of tenure provisions of LTA 1954.

Until recently, it was common for leases to state that the tenant would only be permitted to underlet at the higher of market rent and the rent actually payable under the head lease at the time of the underletting (often referred to as the passing rent). This protected the landlord against having a lower rent agreed for an underletting used as evidence on review of the head lease rent. However, it also deprived the tenant of its only likely method of disposing of the Property where market rent had fallen below the rent payable under the head lease. To get round such restrictions, tenants frequently did deals with undertenants, typically granting the underlease at the same rent as the head lease but entering into a side letter stating that the undertenant would only be required to pay a lesser rent, or that part of the rent would be repaid by the head tenant. There were numerous variations on this scheme, often extending to relaxing repairing obligations in the head lease. Arrangements like this are no longer effective. In Allied Dunbar Assurance plc v Homebase Ltd [2002] 27 EG 144, the Court of Appeal held that an underlease and any side arrangement must be read together. If the combined effect is an underletting that does not comply with the requirements set out in the head lease, the tenant will be in breach.

The problem of tenants not permitted to underlet at less than passing rent has given rise to pressure from the government and a number of landlords have agreed publicly not to impose this requirement in any new leases (see BPF subletting declaration at www.bpf.org.uk) Landlords who do impose this restriction in any case risk the tenant arguing for a discount on rent review .

Giving consent

Before formal consent is given to a proposed assignment or underletting, there is usually a period of negotiation, during which the landlord may request further information about the proposed assignee/undertenant and the terms of the deal. It is important that all parties understand when formal consent has been given. It is common to mark correspondence “subject to licence” but that does not guarantee that a court will not find that the landlord has given consent, even where there are outstanding conditions to be satisfied (Aubergine Enterprises Ltd v Lakewood International Ltd [2002] EWCA Civ 177).

Charging

It is normal for the lease to prohibit charging of part of the Property but most tenants will want to retain the right to charge the whole. In practice, it is more likely that a rack-rented lease will be charged as part of a floating charge over the whole of the tenant company’s assets than as fixed security in its own right. Tenants will want the ability to enter into floating charges without needing landlord’s consent.

Sharing occupation

Commercial leases often allow the tenant to enter into informal sharing arrangements with group companies. Retail tenants may also want the right to grant informal concessions to other traders.