Guide to taking over an existing lease
For many businesses, finding a suitable commercial property in the right location can be difficult and one option is to take on the existing lease of a former tenant. There are a number of issues associated with this however so be aware, as it may be preferable to take a brand new lease. Taking on a new lease would allow you to negotiate directly with the landlord and to take a lease for the length of term you need and on the terms you agree, not just what remains of an old lease.
If taking on an old lease is the only option then there are a number of steps to follow.
- Firstly, you are effectively stepping into the shoes of the old tenant and will be taking on all their liabilities for the property. This may include rent arrears and disrepair in the property which you would need to rectify. If the previous tenant has gone out of business then these liabilities can be substantial. The landlord may even insist these issues are rectified before you take on the lease, although depending on the wording in the lease, they might not be entitled to insist on this.
- It is also important to remember the lease is highly likely to be worded to say you must obtain the landlord’s consent to take on the lease, otherwise the transfer to you may not be valid. You could spend time and money moving into a property only to find the landlord throws you out. A licence to transfer or “assign” the lease will be prepared by the landlord or, more likely, its solicitors and sent to you and the previous tenant for signing.
- Leases taken on by the previous tenant after 1 January 1996 are likely to contain a provision that requires the tenant to sign an Authorised Guarantee Agreement. This would be drafted by the landlord’s solicitor and requires the original tenant to guarantee your performance under the lease. The old tenant is likely to want to resist this and require you to provide your own guarantor instead – if the landlord will accept this.
- The new tenant is likely to need to demonstrate to the landlord that they are capable of keeping up with rental payments and therefore providing trade and bank references will be helpful.
- You must check the terms of the lease carefully and also ask for copies of ancillary documents that may have been agreed varying or adding to the tenant’s responsibilities. This could for example include a licence to alter, which requires you to carry out expensive works of reinstatement at the end of the term.
- You may also need to sign a Rent Deposit Deed, again drafted by the landlord’s solicitor, if a rent deposit is payable for the lease.
- Finally if there are more than seven years remaining on the term of the lease then you must register this at the Land Registry in order for it to be legally binding.
The law around commercial leases is complicated and I would always recommend taking legal advice so that you fully understand the hefty responsibilities and costs associated with them.
This article is not intended to be a full summary of the law and advice should be sought on all issues.
Joanna Clark, Solicitor