News | June 16, 2021

Dear Ben

I want to pay a new tenant to take my lease off my hands. Can I do that?

You are referring to what is known as a reverse premium, because it goes in the opposite way to what might be expected. Rather than an incoming tenant making a payment to an outgoing tenant because it is so keen to take the lease, this is a payment by the outgoing tenant to get rid of the lease.

Reverse premia are becoming increasingly common as tenants marketing their leases find they can only attract assignees with incentive payments. It is a question for surveyors how much the payments are, and some can be large sums. The outgoing tenant can be making major savings by divesting itself of its long term ongoing liabilities under a lease, in terms of rent, service charges, rates and dilapidations liability. So it can still be doing a great deal when paying a reverse premium.

A tenant entering into a new lease directly from a landlord would expect to receive a rent-free period, usually intended to cover the period that they will take fitting out the premises to their requirements, but sometimes longer if it’s a tough market for landlords. It isn’t possible for an existing tenant to give a rent-free period to a company to which it wishes to assign its lease. This is when a reverse premium could be used. The amount might reflect a notional period of rent-free, or it might be to reflect the state of disrepair in which the premises are being handed over to the incoming tenant, as the incoming tenant is going to take on the liability for dilapidations accrued before it became the tenant.

You will need to consider a few issues before you agree to pay a reverse premium. You are taking a credit risk on your intended assignee. You will be paying over a sum of money to the assignee when the assignment takes place, but you will have no way of knowing for sure that the assignee is going to pay the rent. The usual position is that you will have given your landlord a guarantee of the incoming tenant’s performance of the lease covenants (known as an authorised guarantee agreement). Under the authorised guarantee agreement, if the assignee fails to pay the rent, then the landlord can pursue you for the arrears, even though you are no longer the tenant. It goes on to say that if the lease is disclaimed in the event of the bankruptcy of the assignee, the landlord can require you to take a new lease for the remainder of what would have been the term. So you could end up still liable for the lease or even wind up becoming the tenant again, even though you have paid a large sum upfront in the hope of getting rid of the lease.

Because of the risk, parties in practice sometimes enter into an agreement which requires the outgoing tenant to make payments in instalments rather than one big lump sum, often upon proof that the assignee has paid its quarterly rent to the landlord. It should be noted that a secret side letter will not work in the case of an underletting. In Homebase Ltd v Allied Dunbar Assurance plc [2002] the tenant was prohibited (in the usual way) from underletting at less than the open market rent. It wanted to do this, so it entered into a side agreement with the undertenant that whilst the underlease would state the full rent required, the tenant would pay to the undertenant each quarter the difference between the underlease rent and what had really been agreed.

It was held that this side agreement had to be disclosed to the landlord and had to be read with the underlease. The tenant was trying to avoid complying with the pre-condition on its ability to underlet; it was not truly underletting at the open market rent.

There hasn’t been a case on the point so it is not clear whether a similar side agreement should be disclosed to the landlord on an assignment rather than an underletting. Logically it would seem to make sense that ancillary documents should be disclosed. However, it has been held that the landlord is not entitled to know what premium, if any, is being paid, or the other terms of the assignment (Kened v Connie Investments Limited [1995]) and so tenants often keep such arrangements between themselves and their assignees.