Alienation is a key lease clause that you may come across in commercial leases. It is relevant to a number of commercial real estate competencies, including leasing/letting, purchase & sale, landlord & tenant, and property management.
An alienation clause will provide the right to transfer the leasehold interest in a property to another party. Without an alienation clause written into the lease, the interest cannot be transferred, so it is essential that this is considered at the initial heads of terms and lease drafting stage.
The flexibility and extent of an alienation clause can affect a variety of matters, including future use and occupancy of the property by the tenant, capital value for the landlord and control of who occupies the property by the landlord. While landlords can also assign their leasehold interest, we will primarily focus on the rights of tenants in this article.
Alienation clauses provide for a variety of rights, including the right to assign, to sublet (or to underlet – both terms mean the same thing) and to share possession of a property (see table).
At level 3, you need to consider why you might advise a client to assign or sublet their lease. This could be due to a requirement of the lease (eg assignment of whole is permitted, but assignment of part and subletting of whole or part are prohibited), or because of the requirement to dispose of only part or whole of the demise.
Subletting, if permitted, may be preferable if there is a profit rent (ie the difference between headlease rent and sublease rent), although leases often require that the sublease rent must align to the headlease rent to avoid this situation arising.
Subletting may also be advisable if the intermediate tenant may want to take back possession and re-occupy the property in the future.
Key considerations
If you are advising on applications from a tenant to assign or sublet in relation to the property management competency, you will need to consider the following:
- What rights does the tenant have? Ensure you read the lease carefully.
- Will the tenant give an undertaking for the surveyor’s costs and legal costs?
- What is the proposed rent and what does the lease say about what this must be?
- What will be the impact on capital/investment value for the landlord? This could be influenced by the ingoing tenant’s covenant strength. Have you checked the tenant’s accounts and credit reference?
- What does the lease say in terms of granting consent and documenting this by way of a formal licence? Are there any reasonable grounds for withholding consent that must be considered?
- What security might be required, such as a rent deposit or authorised guarantee agreement?
You also need to be aware of the Landlord and Tenant (Covenants) Act 1995, relating to assignments only. This became effective relating to leases dated 1 January 1996 and it is not retroactive (ie it does not apply to leases granted before this date, some of which may still be in force). For “old” leases (agreed before 1 January 1996), an original tenant who assigned a lease, as well as subsequent tenants and guarantors, remained liable under the lease until expiry.
For “new” leases (agreed on after 1 January 1996), privity of contract was abolished so the former tenant was released from all liabilities under the lease following assignment. This meant that a former tenant could not be pursued for rent arrears, for example, relating to a lease assigned many years ago.
An authorised guarantee agreement can be required by a landlord, where reasonable. This is an agreement between the landlord and the most recent assignor to guarantee the lease obligations of the immediate assignee. This falls away on future assignment, so the original (or subsequent) assignors could not be held liable for future liabilities indefinitely. Reading up on the provisions of sections 17-20 of the 1995 Act is recommended if you are advising clients on privity of contract and assignments.
Best practice
The RICS Professional Standard Code for Leasing Business Premises (1st edition) provides mandatory and best practice guidance on agreeing alienation provisions in new leases.
Leases should allow tenants “to assign the whole of the premises with the landlord’s consent, which is not to be unreasonably withheld or delayed”.
The guidance provides further clarity on more specific alienation requirements and provisions, which you should read.
Being aware of different forms of alienation and being able to advise on their agreement, interpretation and implementation is an essential skill for a chartered surveyor involved in this area of practice. It is recommended that you refer back to the APC Series article How to summarise a lease for a rent review from earlier this year to practice your skills in interpreting alienation clauses, before considering the impacts on your client and how you should best advise them.
Different types of alienation
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Assignment |
This is where the tenant (T1 – assignor) transfers their interest (as tenant) to the new tenant (T2 – assignee). T2 has a direct relationship (privity of contract) with the landlord. |
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Subletting/underletting |
This is where the tenant (T1) retains their interest but grants a sublease to the sub-tenant (T2). T2 pays rent to the intermediate tenant (T1) who then pays rent to the landlord. Thus, T1 retains an intermediary interest and T2’s interest sits below theirs. |
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Sharing possession |
This is typically where the tenant shares occupation with another party (such as a group company or a concession), but no landlord and tenant relationship or security of tenure is created. There are likely to be limitations on the amount of space that can be shared, eg 25% of the total floor area. |
The quick quiz
1. What the is 2024 general election date?
- a) 4 July 2024
- b) 5 July 2024
- c) 4 August 2024
2. When was the dissolution of Parliament prior to the general election this year?
- a) 30 June 2024
- b) 30 May 2024
- c) 21 May 2024
3. What does “professional standard” mean in terms of RICS guidance?
- a) Sets requirements or expectations for RICS members and regulated firms
- b) Provides information to support the practice of RICS members and regulated firms
- c) Provides ideas for how to comply with regulation for RICS members and firms
Jen Lemen BSc (Hons) FRICS is a co-founder and partner of Property Elite
