Where a tenant wants to exit a commercial lease before it's due to end, can it simply find a replacement tenant and walk away?
There are any number of reasons a tenant might want to exit a lease early. It could have outgrown the premises. It may be struggling to turn a profit. Or perhaps it has a surplus of space now that most of its employees are working from home.
But, where a lease still has years to run, there is no break option to exercise (see our top ten tips for serving lease break notices in Scotland) and there is no scope to negotiate an early exit with the landlord, what can a tenant do?
One possibility which a tenant might explore is assignation.
What is assignation?
Put simply, assignation (known as assignment in England) is the transfer of an interest under a lease to another party.
Usually, in Scotland, the original tenant can simply walk away, once the assignation is complete, and will have no ongoing liability under the lease.
Can a tenant assign its interest under a lease to another party?
The default position in Scotland is that a tenant is free to assign its lease to a new tenant. However, in practice, almost every commercial lease will restrict that freedom.
Sometimes, a lease will exclude assignation entirely. Sometimes it will be prohibited in the first few years of the lease. However, most of the time, there will be some iteration of a clause which provides that a tenant can assign its interest, but only with the consent of the landlord.
Usually, though not always, the clause will provide that the landlord's consent must not be "unreasonably withheld".
Tips for making / dealing with an application for consent
Like most contractual questions involving an assessment of what is "reasonable", this is an area where disputes arise frequently.
Whether or not a landlord is entitled to refuse consent depends on the specific facts and circumstances but there are some general points to keep in mind.
- Check the terms of the lease carefully. The precise wording is important. It may, on close inspection, involve a two-stage test. For instance, the lease may provide that consent should not be unreasonably withheld where the proposed assignee is a FTSE 100 company or where the proposed assignee is "respectable and responsible". In such instances, the landlord need only act reasonably if the proposed assignee meets the stage one test of being a FTSE 100 company or "respectable and responsible".
- In the case of a dispute, the burden is on the tenant to prove that the landlord unreasonably withheld its consent, rather than the landlord having to prove that it acted reasonably in so doing.
- The landlord cannot withhold consent on arbitrary grounds, which have nothing to do with the relationship of landlord and tenant in regard to the subject matter of the lease.
- Consent cannot be withheld in order to gain a collateral benefit e.g. to procure an increase in the frequency of rent reviews or to tighten up the tenant's repairing obligations (although it is reasonable to require that – for instance – arrears are paid before consent is granted).
- The landlord generally only needs to consider its own interest but there might be situations where the benefit of refusing consent is so significantly outweighed by the detriment to the tenant, as to make the refusal of consent unreasonable.
- From a practical perspective, it is likely to be sensible for tenants to seek consent early, rather than wait until protracted negotiations have taken place with the proposed assignee.
- If refusing consent, a landlord must set out all of its reasons. If it fails to do so then it cannot later rely upon a reason which it subsequently thinks of but which it failed to give at the relevant time.
- Finally, landlords should remember to check the lease as it will likely provide that the tenant must pay the landlord's costs for dealing with an application for consent.
If consent to an assignation is unreasonably withheld by a landlord, a tenant may obtain a court order declaring that to be the case and ordaining the landlord to grant consent. The landlord will also be liable to pay damages for any loss caused by the unreasonable refusal to grant consent.
If you require advice in relation to an application for consent to an assignation, please do not hesitate to get in touch with our Real Estate Disputes team or your usual Brodies' contact.