Buying a public house or restaurant business often involves taking on a lease of the property from which the business is run. This is known as an Assignation of Lease and occurs where a tenant’s interest in a lease is transferred from the tenant to another party (known as the assignee).
Following an assignation, the assignee becomes directly liable to the landlord for all obligations under the lease. Upon completion of the assignation the original tenant is usually relieved of all future liability under the lease.
Landlord consent and satisfying the lease test
It is normal in commercial leases for the landlord’s consent to a proposed assignation to be obtained in advance of the transfer. To neglect to obtain landlord’s consent (if required by the lease) would mean a breach of the terms of the lease and any resulting assignation would be invalid. When thinking about the timescales between identifying a new business opportunity and opening the doors to serve the first meal or pull the first pint, it would be sensible to factor in adequate time to obtain the landlord’s consent to the assignation.
Normally there is a test set out in the lease which a proposed assignee must meet before the landlord will consent to them stepping into the shoes of the tenant. The test usually relates to the assignee’s ability to comply with the obligations under the Lease and in particular paying the rent. If the proposed assignee is unlikely to satisfy that test then the landlord may be able to withhold consent and the assignation and therefore the purchase of the business cannot proceed. It is therefore advisable that the parties consider the financial covenant of the assignee prior to submitting an application for consent and for the inclusion of accounts and references in support of the application.
All is not lost just because the assignee may be embarking on their first business venture and therefore has no supporting documentation. A landlord may still consent to an assignation but may require additional security most likely by way of a rent deposit agreement or a personal guarantee. Advice should be taken in relation to both these documents.
Assignees have responsibility for property damage or deterioration
Assuming the assignee satisfies the test and the assignation can proceed, it is important for an assignee to realise when they take on a lease mid-way through they become responsible for all matters under the Lease regardless of whether an issue arose before or after the date that the assignee commences occupation. This is particularly relevant (and often costly) in relation to dilapidations.
Damage or deterioration of the property may have occurred prior to the date that the assignee took over the business, but the assignee will be responsible for the cost of remedying that damage at the end of the lease (or any other time that the landlord may choose to prepare a dilapidations schedule).
A full report on the terms of the Lease should be obtained from a solicitor prior to signing an assignation to avoid potentially costly liabilities hitting profit margins later on.