The Break Clause, the Rent Deposit and the Assignee
You act for a landlord who owns a small retail parade. Unit 3 is let to a limited company, 'Harbour Gifts Ltd', on a 10-year lease from 1 April 2022 at £24,000 per annum, payable quarterly in advance. The lease has a tenant-only break at the end of year 5 (31 March 2027), conditional on the tenant giving not less than six months' written notice and having paid all rent and being 'materially compliant' with repair obligations. The tenant paid a rent deposit of £6,000 at grant, held by the landlord. The tenant now wants to assign the lease to a new company, 'Coastline Retail Ltd', which has traded for eight months and has net assets of £12,000. The lease requires landlord's consent to assignment, such consent 'not to be unreasonably withheld', and contains an AGA (authorised guarantee agreement) requirement for the outgoing tenant.
The landlord is nervous about the assignee's covenant strength and asks you how to respond. The tenant's solicitor has pressed for a decision within five working days.
1. Advise the landlord on the conditions it can properly attach to consent to the assignment, and identify anything it cannot do.
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Because the lease says consent is 'not to be unreasonably withheld', the landlord can attach reasonable conditions but cannot use the request as a lever to extract unrelated concessions (e.g. a rent increase or a surrender of the break). Under the Landlord and Tenant Act 1988 the landlord must give consent within a reasonable time and, if refusing, give reasons in writing; a breach can expose the landlord to a damages claim.
Reasonable conditions here would include:
- AGA from Harbour Gifts Ltd - permitted because the lease expressly requires it. The outgoing tenant guarantees the assignee's performance for the remainder of the term (or as the lease specifies).
- Top-up of the rent deposit to a level reflecting the assignee's covenant - but only if the lease permits variation of the deposit; check the deposit clause. If it does not, the landlord cannot unilaterally demand a top-up as a condition of consent.
- References / financial information on Coastline Retail Ltd - reasonable to request, but the landlord cannot refuse simply because the assignee is a new, small company if the AGA is in place; that is precisely what the AGA is for.
What the landlord cannot do: refuse on the ground that it would rather have a different tenant; demand a higher rent; demand the tenant waives the break; or delay beyond a reasonable period. The five-day request is short but the landlord should respond promptly, at least to confirm what it needs.
2. The assignee takes the lease and, in February 2027, serves six months' notice to break on 31 March 2027. The landlord says the notice is invalid because it was served by the assignee, not the original tenant. Is the landlord right, and what should you advise?
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The landlord is likely wrong. A break right is a property right that runs with the lease; once the lease is assigned, the current tenant (Coastline Retail Ltd) is the party entitled to exercise the tenant's break, subject to the lease's terms. The original tenant's AGA does not transfer the break right back to Harbour Gifts - the AGA is a guarantee of the assignee's obligations, not a reversion of the tenant's rights.
However, the break is conditional: notice of not less than six months, all rent paid, and 'materially compliant' with repair obligations. Six months' notice served in February 2027 for a 31 March 2027 break date is too short - the notice period is not met, so on its face the break fails regardless of who served it. (Check the exact wording: some break clauses require notice to be given by a specified date; here it is a minimum period, which six weeks does not satisfy.)
The landlord should not simply reject on the 'wrong party' point, which is weak and could expose it to a dispute. It should reject on the notice period point, which is clear on the facts, and confirm in writing. Advise the landlord to take legal advice before relying on forfeiture or treating the lease as continuing, and warn that if the tenant disputes it, the landlord must be confident of its position. Also check whether rent was fully paid and whether the repair condition is met - any one failed condition defeats the break.