A Guide to the Property Market of England & Wales
Part IV - The Legal Principles in the Disposal of Office Property
Freehold
The disposal of a freehold interest is usually quite straightforward and generally there are no restrictions on how a freeholders can dispose of his interest subject to any covenants or easements which may affect the freehold title.
Leasehold
A tenant cannot normally vacate the premises and cease paying rent to his landlord at any time he wishes. It should be noted that the legislation enforcing this is also to protect the tenant's interests.
If a tenant has taken a lease for a fixed number of years, then he remains responsible for adhering to the covenants including the payment of rent until the expiration of the term unless he can either assign or underlet the premises (see paragraph below) or persuade the landlord to accept a surrender or indeed, at the initial negotiations prior to the commencement of the term, agree the incorporation of options to break the lease. Break option(s) may be for a fixed or rolling date but may not necessarily coincide with the date when the tenant wishes to vacate. The inclusion or otherwise of these options is very much dependent on the market conditions at the time of the initial negotiation. Options to break can be solely for the benefit of either the tenant or the landlord or they can be mutual, depending upon the initial negotiations.
If the lease does not contain a break option and the landlord does not wish to take a surrender, the only way that an existing tenant can dispose of a leasehold interest, depending on the precise wording of the lease contract, is by way of an assignment, or underletting, as mentioned above. It is important to bear in mind that should a tenant assign his lease to a third party then he continues to maintain an indirect relationship with the landlord, unless that lease was granted after 1st January 1996, until the expiration of the term of the lease. This is covered under Privity of Contract. In effect, the original tenant and subsequent assignees, however many there may be, remain responsible for the full term of the lease and if the current assignee in possession defaults, then the tenants up the chain must comply with the lease i.e. the payment of rent and fulfilment of all the obligations contained within the lease.
If the lease is granted after 1st January 1996 it will be subject to the provisions of the Landlord & Tenant (Covenants) Act 1995. The government's intention was to solve the problems caused by privity of contract as set out above. This Act effectively relieves an assignor from having to guarantee its assignee, subject to an Authorised Guarantee Agreement, while still protecting a landlord's investment value. An AGA has become the norm, but can be negotiated out by a tenant, which is a mechanism similar to the effects of Privity. The principal difference is that an assignor only has to guarantee the first assignee and no more. Through negotiation it is possible to ensure that a tenant can eventually succeed in being released.
Part I - Property Tenure
Part II - Property Leases
Part III - The Legal Principles in the Acquisition of Office Property
Part IV - The Legal Principles in the Disposal of Office Property
Part V - Lease Provisions
Part VI - Property and Associated Costs
Part VII - The Steps to Acquiring Offices
Part VIII - Conclusion
Glossary of Terms