Assigning Lease - Guarantees

[teamjoel]

Hi all,

Currently selling the business and as such are assigning the lease over to the new owners.

Now, it appears that the 'deed of covenant' attempts to make us, the original tenants, guarantee the Assignee in the sense that if the Assignee fails to make payment/goes bankrupt, we have to cover this. Is this standard procedure with assigning leases?


Thanks in advance

 

[Rhodes100]

The answer is yes, it is normal. However when they transfer the lease or the original lease period ends then you will be released.

For this reason I cannot understand why business owners insist on longer leases. How can they know what the trading conditions in the area will be like in 10 years time? They clearly dont understand these guarantee issues.

As part of the assignment the landlord should be provided with references, including a bank reference (status report).

Your agent in the first instance and your solicitors should be able to advise you whether it would be advisable to sell to this party.

The final decision will be your landlords, and if they are not happy with these references simply they will not agree to the transfer.

 

[teamjoel]

Agreed, but this kind of agreement affects outgoing tenants irrespective of the duration of the lease. Also, there are many variables that can contribute to the demise of the business whether it be profitability, the trading location, or the disintegration of a partnership, for example.

In the event of unpaid rent, would the Landlord pursue the assignee vigorously before pursuing the outgoing Tenant?

Is there no protection for the outgoing Tenant unless expressly stated in the lease?? for example if the lease has 3 years remaining, the outgoing Tenant is not 'in the clear' for this duration and as such is basically putting their future on the assignee...

Also, do you not agree that allowing such agreements to exist puts the landlord in a very comfortable position as it allows them to use the AGA as a very powerful bargaining chip?

Many Thanks

 

[julie001]

I noticed in one of your other posts you mentioned you were selling your business for a small nominal fee. Does your lease have a break clause? If so, it may be preferable to just give notice to leave as opposed to assigning the lease, depending on whether you have doubts that your business is viable or the incoming teant is reliable.

Do you have a good relationship with your landlord? They may be willing to be flexible regarding the AGA- ie if faced with a choice between you giving notice to leave, or assigning the lease to an incoming tenant but with no AGA, I'm sure there's half a chance they would prefer to keep someone in the building paying them rent.

 

[teamjoel]

Unfortunately there is no break clause.

The relationship with the Landlord has never been tested; rent has always been paid on time and in full.

In effect, the AGA ultimately puts responsibility back on us and as such I am very uncomfortable with agreeing to it. All outgoing tenants have no collateral asset-wise so it seems futile to have the outgoing tenants tied up in an AGA. Obviously circumstances change so in this regards, I do not feel any assets I acquire in the future (whether they be cash, a house etc) could be safe.

If we can't agree over a waiver of the AGA, I can't see myself agreeing to the assignment, and therefore the only other option would be to dissolve the business. If this were to be the case we would not be able to pay the next rent instalment. Quite the catch-22!

Also what would be the likelihood of the AGA being waived for a fee?

Many Thanks

 

[julie001]

Everything is negotiable, but whether you will get any compromise from the landlord will most likely depend upon the status of the incoming tenant- are they able to show good bank and trade references, do they have previous experience of running a business, do they own any assets or their own home? etc etc.

Asking the landlord to waive the AGA for a fee is a good idea- if no joy, you could also try asking the landlord if he is willing to cap the sum you could be liable for under the AGA.

I would also explain to the landlord that you intend to leave one way or the other, and the alternative is that you would have to close your business and would therefore not be able to afford to pay the rent.

 

[markwalton]

Yes this is standard check with your solicitor to confirm your lease has provision for this.

Regards

Mark

 

[LawHound]

Its very normal and in our experience the landlord will go for the lowest hanging fruit each time, why wouldn't they? Get a new lease if this is not a high paying business, or get security in a form you can rely on to cover your for any breach on payment.

 

[teamjoel]

Get a new lease if this is not a high paying business, or get security in a form you can rely on to cover your for any breach on payment.

By new lease, do you mean get the assignee to rather sign a new lease with the landlord than merely be 'assigned' the lease? And also what securities do you speak of?

Everything is negotiable, but whether you will get any compromise from the landlord will most likely depend upon the status of the incoming tenant

The incoming tenant is of good stature and is far more likely to keep up payments! This should provide some good 'ammo'. I'll be calling the Landlords agents first thing in the morning to try and negotiate some kind of deal. As you said, everything is negotiable...

 

[Rhodes100]

Has the landlord agreed to an assignment in the first instance?

If the landlords says no because the new owner has no money behind them, then the sale will not happen. He may demand that 6 months rent deposit is held, which usually means that the sale collapses as the buyer doesnt have that money.

If the landlord refused to assign, one possible solution is to see whether someone is willing to act as guarantor for your buyer usually a relative of theirs.

The landlord will then have 3 point of calls.

1. The lessee
2. The guarantor
3. You

in that order this will put a little more distance between you and the potential liability.

 

[teamjoel]

The assignment is pending references.

Also, by nature of the assignment, the outgoing tenant in effect will be acting as guarantor. I have spoken with the Landlords solicitor today and proposed a waiver of the AGA in return for a fee. Currently waiting on hearing back about this.

Would a viable option to offset the risk be to protect future assets i.e. cash savings etc by way of a trust?

 

[Rhodes100]

You are absolutely convinced that the new owner is going to fail, but what evidence do you have about this?

I have to be frank and honest with you, I think you are too worried about the possibility of the landlord coming back to you.

You have to exhibit supreme confidence in this transfer with all parties, if they sense your desperation and anxiety then the sale will collapse because one or both the landlord or purchaser will decide that it is too risky.

I understand that it is a stressful situation but sometimes the parties talk themselves into the transfer collapsing by sending out the wrong signals and demanding changes to standard agreement terms, and I can see this happening here if you are not careful.

If it does collapse you will be back running your business next month without any prospect of a sale instead of being able to move on with your life.

 

[teamjoel]

Oh no, I am absolutely confident in the purchaser succeeding; I was simply unaware of such clauses being common in commercial leases and was therefore intially quite taken aback and wary. I do tend to err on the side of caution and perhaps somewhat over-prudent in this situation.

For reference, after having a chat to the Landlords solicitor a waiver of the AGA would not be viable as he would advise his client otherwise. However after reading Rhodes' post I believe it would be the better option to push the License to Assign & AGA through as is so that this opportunity is not lost.