In a normal situation, anyone who holds a lease and then transfers it to someone else remains liable under the lease after he has parted with it. Many people are unaware of this but it is very important.

Anyone intending to take on a lease, or to transfer an existing lease, is urged to read this note carefully and seek advice if necessary.

The Problem

When a tenant takes on a lease, either as the original tenant or by having it transferred to him, he becomes liable to the landlord to pay the rent and to perform the covenants on the part of the tenant contained in the lease.

These covenants can be onerous. Apart from being obliged to pay the rent, a tenant may be liable to put the premises into a good state of repair.

What is not generally appreciated is that anyone who holds a lease usually remains liable under the lease even after he has transferred the lease to someone else.

The Original Tenant is liable:-

For as long as he holds the lease;

He will probably also remain liable during the time the lease is held by the person to whom he transfers the lease;

If the lease was granted before 1st January 1996 he will nearly always be liable for the whole of the term of the lease (and possibly even longer than that), no matter how many times the lease changes hands.

A person to whom a lease is transferred is called an assignee.

An assignee is liable:-

For as long as he holds the lease;

He will also usually be liable during the time the lease is held by the person to whom he transfers the lease;

In the case of leases granted before 1st January 1996, he will often be liable for the remainder of the term of the lease however many times it changes hands (and, as before, possibly longer).

Indemnity Covenants

When a lease is transferred, the person taking over the lease will usually have to covenant with the transferor to indemnify (i.e. protect) him against any claims made against him after the transfer of the lease.

An indemnity covenant is only any good if the person giving it has the funds to satisfy any claims. If A transfers a lease to B, and B fails to pay the rent, A will probably have to pay the rent to the landlord. A will then have a claim against B but the claim will be worthless if B has not got the money to pay.

Guarantors

In the context of leasehold property, a guarantor is a person who enters into a covenant to pay compensation if the tenant fails to comply with his obligations under the lease. Usually, the guarantee is given in favour of the landlord but it may be in favour of a previous tenant. Just like a tenant, a guarantor can be liable for longer than the time during which the lease is held by the person whose liabilities he has guaranteed.

A guarantor can be very vulnerable and should always take appropriate advice.

Passing on any claim

Anyone receiving a claim in respect of a lease he has sold on may have a claim against a subsequent holder of the lease or the guarantor of any such person. As a general rule, ultimate liability normally rests with persons who held the lease later rather than earlier. However this is a complex area and each case depends on its own facts and a careful reading of the documents involved.

Putting the Risk in Proportion

In practice leases are bought and sold every day of the year and the number of claims against former leaseholders is relatively small. However, there are still a significant number of claims against former leaseholders, especially where the market rent for the property is below the rent payable under the lease or trading conditions are difficult.  When passing on a lease, it is essential to be comfortable about the new tenant's financial strength.  The risk can be avoided if the landlord will accept a surrender of the existing lease and grant a new one.  This however can be expensive because a stamp duty land tax charge will arise on the new lease unless the rent is below the stamp duty limit.

Preventive action

A leaseholder wanting to transfer his lease should always take account of his continuing liabilities under the lease. He must consider the financial strength of the proposed assignee because if the assignee fails, he may be called upon by the landlord to pay the rent and compensate the landlord for any other default by the assignee. This usually means taking up references, not only to persuade the landlord to accept the assignee as tenant but also for the tenant's own protection.

Important note