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What is today's blog about?
This week we will take a look at alienation - essential knowledge for RICS AssocRICS and APC candidates, students and qualified Chartered Surveyors (MRICS/FRICS).
Essential reading for RICS APC and AssocRICS candidates.
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Why is this relevant?
Alienation simply means dealing with a leasehold interest in property, e.g. by way of assignment, sub-letting, sharing occupation or charging.
Alienation is governed primarily by the terms of the lease, although relevant legislation and caselaw will also impact upon what can and cannot be done by both the landlord and tenant.
Understanding alienation is important for RICS AssocRICS and APC competencies such as Landlord & Tenant and Leasing/Letting.
What is alienation?
When agreeing lease terms, it is prudent for both parties to consider an exit strategy prior to contractual expiry (or a break clause).
For a tenant, this might be where they wish to dispose of the lease to relocate or to seek larger premises. For a landlord, they may wish to sell the freehold (subject to the occupational lease).
This exit strategy could be provided by the alienation clause, typically by way of assignment or subletting. It is more important to have a flexible alienation clause in a longer lease, as it may be some way off before it can be terminated either at expiry or by operation of a break clause, for example.
Landlords generally want to retain control over who occupies their property, i.e. to ensure that their investment is secure. They can do this by placing restrictions on how the tenant can deal with the lease.
In this article, we will focus on alienation from the tenant's perspective.
What is assignment?
Assignment is where a third party effectively steps into the shoes of the current tenant, i.e. the lease is transferred to another party who becomes the new tenant.
A landlord will not want to let the original tenant assign their lease to a weaker covenant, who may not be able to pay the rent for the duration of the lease. The landlord may also want to retain control over the identity of the occupier in a multi-let estate, e.g. shopping centre.
What is subletting?
In this scenario, a sub-lease is granted from the original tenant to a sub-tenant - meaning that the original landlord & tenant relationship remains intact.
A landlord will again wish to retain control over the occupational tenant, particularly in terms of their ability to pay rent and to adhere to the head tenant's obligations in the head lease. This is because in certain circumstances, the sub-tenant can become a direct tenant of the landlord - cutting the original head tenant out of the picture.
What types of alienation clause are found in a typical commercial lease?
If there is no alienation clause in a lease, then the parties are free to deal with the lease as they wish. However, this is very rare for obvious reasons.
Generally, the alienation provisions will confirm whether:
The tenant can assign and/or sublet
Dealings are of part(s) and/or whole
Landlord's consent is required, and, if so - whether it is not to be unreasonably withheld or delayed
There are any conditions, e.g. subletting at a market rent
The alienation clause may also mention sharing occupation and charging. The former relates to sharing occupation with a third party, e.g. concession in a retail shop. The latter relates to charging the lease to a lender.
The exact nature of the alienation clause will depend on the original bargaining powers of the parties and the specific attributes of the property (e.g. some may be more easily split into parts than others).
What are the implications of the Landlord & Tenant (Covenants) Act 1995?
Before 1 January 1996, the original tenant remained liable until expiry, together with any subsequent tenants and guarantors who gave a direct covenant (via a Licence to Assign) to the landlord. This was known as privity of contract.
From 1 January 1996, privity of contract was abolished so the original tenant was automatically released from any future liability upon assignment. Where reasonable, a landlord can ask for an Authorised Guarantee Agreement (AGA) which effectively requires the most recent former tenant to guarantee the lease obligations of the immediate assignee. It will away upon future assignment of the lease.
Certain conditions may be specified in the assignment clause, which, if not met, the landlord will be considered to be acting reasonably in refusing consent to assign.
There is extensive caselaw relating to whether a landlord's refusal to give consent was reasonable or not, together with recent legal battles relating to whether an assignment of a lease to a guarantor is void or not.
What are the implications of the Landlord & Tenant Act 1927 and 1988?
The 1927 Act says that where an alienation clause requires landlord's consent, this is subject to an implied clause that this should not be unreasonably withheld or delayed.
The 1988 Act says that where landlord's consent is not to be unreasonably withheld, once a tenant submits a formal application to assign or sublet, the landlord has a duty to give consent via written notice to the tenant (except where it is not reasonable to do so).
Why does this matter?
Surveyors are frequently asked to give advice on alienation clauses:
Basis of a new letting (and transposed into Heads of Terms)
Dealing with a rent review, perhaps where an alienation clause is overly restricted
Property management where a tenant has requested to assign or sublet
Pursuing a former tenant or current guarantor for rental arrears
Acquiring a freehold on behalf of a landlord Valuing a property
It is, therefore, important to understand what alienation is and how it impacts upon value.
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N.b. Nothing in this article constitutes legal or financial advice.