Leases and underleases - Alienation clauses (assignment, subletting)

Learning Outcomes

After reading this article, you will be able to explain the legal rules and practical implications of alienation clauses in leases, including assignment and subletting. You will understand the statutory framework, the types of covenants, the process for obtaining landlord consent, the use of Authorised Guarantee Agreements (AGAs), and the consequences of breaching alienation provisions. You will be able to apply these principles to SQE1-style scenarios.

SQE1 Syllabus

For SQE1, you are required to understand the operation and effect of alienation clauses in leases and underleases. Focus your revision on:

• The legal meaning and function of alienation clauses in leases.
• The distinction between assignment and subletting.
• The statutory rules governing landlord consent to assignment and subletting.
• The effect of the Landlord and Tenant Act 1927 and the Landlord and Tenant (Covenants) Act 1995.
• The use and limitations of Authorised Guarantee Agreements (AGAs).
• The consequences of breaching alienation provisions.
• How to advise on and draft suitable alienation clauses in leases.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the difference between an assignment and a subletting of a lease?
2. Under what circumstances can a landlord refuse consent to an assignment or subletting?
3. What is the effect of an Authorised Guarantee Agreement (AGA) in a lease granted after 1 January 1996?
4. What are the consequences if a tenant assigns or sublets in breach of a qualified covenant?

Introduction

Alienation clauses in leases control how tenants can transfer their leasehold interests to others. These clauses are essential in commercial and residential leases, as they balance the landlord’s need to control occupation and the tenant’s need for flexibility. The law distinguishes between assignment (transfer of the whole lease) and subletting (grant of a new lease out of the tenant’s interest). Statutory rules and case law set limits on how landlords can restrict or control these dealings.

Alienation Clauses: Purpose and Types

Alienation clauses specify whether, and on what terms, a tenant may assign (transfer) or sublet (grant a lease out of) their interest in the property. They are usually found in commercial leases but are also relevant in long residential leases.

Key Term: alienation clause A lease provision restricting or regulating the tenant’s ability to assign, sublet, or otherwise deal with their leasehold interest.

Alienation clauses can take several forms:

• Absolute covenant: Prohibits assignment or subletting entirely.
• Qualified covenant: Permits assignment or subletting only with the landlord’s consent.
• Fully qualified covenant: Permits assignment or subletting with landlord’s consent, which must not be unreasonably withheld.

Key Term: assignment The transfer of a tenant’s entire leasehold interest to a new tenant (assignee), who steps into the lease for the remainder of the term.

Key Term: subletting The grant by a tenant of a new lease (sublease) out of their own lease, for a term less than their own, while the tenant remains liable to the landlord under the head lease.

Statutory Framework: Landlord’s Consent

Landlord and Tenant Act 1927

Section 19(1) of the Landlord and Tenant Act 1927 upgrades qualified covenants against assignment or subletting by implying that landlord’s consent “is not to be unreasonably withheld.” This means that, unless the lease expressly prohibits assignment or subletting (absolute covenant), the landlord must act reasonably when considering a tenant’s request.

Key Term: qualified covenant A lease provision allowing assignment or subletting only with the landlord’s consent.

Key Term: fully qualified covenant A lease provision allowing assignment or subletting with landlord’s consent, which cannot be unreasonably withheld.

Section 1 of the Landlord and Tenant Act 1988 further requires landlords to give their decision within a reasonable time and to provide written reasons if consent is refused.

Landlord and Tenant (Covenants) Act 1995

For leases granted on or after 1 January 1996, the Landlord and Tenant (Covenants) Act 1995 (“the 1995 Act”) changed the rules on liability after assignment. The outgoing tenant is automatically released from future liability unless they enter into an Authorised Guarantee Agreement (AGA).

Key Term: Authorised Guarantee Agreement (AGA) An agreement under which an outgoing tenant guarantees the immediate assignee’s performance of lease covenants after assignment, as permitted by the 1995 Act.

Assignment: Process and Landlord’s Consent

Assignment involves the tenant transferring their entire leasehold interest to an assignee. The lease will specify whether assignment is permitted and, if so, on what terms.

• If the lease contains an absolute covenant, assignment is prohibited.
• If the lease contains a qualified or fully qualified covenant, assignment is permitted with landlord’s consent, which must not be unreasonably withheld.

Landlords can only refuse consent on reasonable grounds. Common reasonable grounds include:

• The proposed assignee lacks financial standing.
• The assignee’s intended use would breach the user covenant.
• The tenant is in arrears or in breach of other lease covenants.

Exam Warning Landlords must give written reasons for refusing consent. Failure to do so may make the refusal invalid.

If the lease is a “new lease” (granted on or after 1 January 1996), the landlord may require the outgoing tenant to enter into an AGA as a condition of consent, but only if the lease expressly allows this or it is reasonable to do so.

Worked Example 1.1

A tenant wishes to assign their lease to a new company. The lease contains a qualified covenant against assignment. The landlord refuses consent, stating only that they “do not like the proposed assignee.”

Answer: The landlord’s refusal is likely to be unreasonable. The landlord must have a valid, lease-related reason for refusing consent. Disliking the assignee is not sufficient.

Subletting: Process and Landlord’s Consent

Subletting involves the tenant granting a new lease out of their own leasehold interest. The sublease must be for a term less than the tenant’s own lease. The lease will specify whether subletting is allowed and, if so, on what terms.

• Absolute prohibition: Subletting is not permitted.
• Qualified/fully qualified covenant: Subletting is permitted with landlord’s consent, which must not be unreasonably withheld.

Landlords may impose conditions on subletting, such as:

• Requiring the sublease to be on similar terms to the head lease.
• Prohibiting further subletting.
• Requiring the subtenant to enter into direct covenants with the landlord.

Key Term: head lease The original lease granted by the landlord to the tenant, out of which a sublease may be granted.

Key Term: sublease (underlease) A lease granted by a tenant out of their own leasehold interest, for a term less than their own, while the tenant remains liable under the head lease.

Worked Example 1.2

A tenant grants a sublease for a term longer than their own lease. Is the sublease valid?

Answer: No. A tenant cannot grant a sublease for a term longer than their own lease. The sublease will be limited to the tenant’s remaining term.

Authorised Guarantee Agreements (AGAs)

For leases granted on or after 1 January 1996, the outgoing tenant is automatically released from future liability on assignment. However, the landlord may require the outgoing tenant to enter into an AGA, guaranteeing the immediate assignee’s performance of the lease covenants. The AGA cannot extend to future assignees.

Revision Tip AGAs are only permitted for the immediate assignee and only if the lease allows or it is reasonable to require one.

Worked Example 1.3

A tenant assigns their lease and enters into an AGA. The assignee later assigns the lease to a third party. Is the original tenant still liable?

Answer: No. The AGA only covers the immediate assignee. Once the assignee assigns the lease, the original tenant is released from liability.

Breach of Alienation Clauses

If a tenant assigns or sublets without landlord’s consent where required, this is a breach of covenant. The landlord may have remedies, including:

• Forfeiture of the lease (if the lease contains a forfeiture clause).
• Injunction to prevent unauthorised assignment or subletting.
• Damages for any loss suffered.

Key Term: forfeiture The landlord’s right to terminate the lease early due to tenant’s breach of covenant, such as unauthorised assignment or subletting.

Worked Example 1.4

A tenant sublets part of the premises without landlord’s consent, breaching a qualified covenant. What can the landlord do?

Answer: The landlord may serve a section 146 notice (if required), seek to forfeit the lease, or claim damages, depending on the lease terms and the seriousness of the breach.

Practical Drafting Points

When advising on or drafting alienation clauses, consider:

• Whether assignment and subletting are permitted at all.
• What conditions or restrictions apply (e.g., financial standing, use, group companies).
• The process and time limits for seeking landlord’s consent.
• Whether AGAs are permitted or required.
• The need for subleases to mirror the head lease terms.
• Prohibitions on further subletting or assignment by subtenants.

Revision Tip Always check the lease wording and the relevant statutory provisions before advising on assignment or subletting.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Alienation clauses regulate assignment and subletting in leases.
• Assignment is the transfer of the whole lease; subletting is the grant of a new lease out of the tenant’s interest.
• Qualified and fully qualified covenants require landlord’s consent, which cannot be unreasonably withheld.
• The Landlord and Tenant Act 1927 and 1988 set out rules on landlord’s consent and reasons for refusal.
• The Landlord and Tenant (Covenants) Act 1995 governs liability after assignment and allows AGAs for immediate assignees.
• Breach of alienation provisions may entitle the landlord to forfeit the lease or claim damages.
• Always check the lease wording and statutory rules before advising on assignment or subletting.

Key Terms and Concepts

• alienation clause
• assignment
• subletting
• qualified covenant
• fully qualified covenant
• Authorised Guarantee Agreement (AGA)
• head lease
• sublease (underlease)
• forfeiture