Alienation in commercial leasing
In commercial property law, alienation means transferring some or all of your rights under a lease to another party.
Alienation covers two main methods:
- Assignment: transferring the entire lease to someone else.
- Underletting (Subletting): renting out all or part of the premises to another occupier while keeping your own lease.
Assignment: Transferring the lease to someone else
With an assignment, you hand over your lease to a new tenant, known as the assignee. Once completed, the assignee pays rent directly to the landlord and takes on all the tenant’s obligations under the lease.
For leases granted on or after 1 January 1996, landlords commonly require the outgoing tenant to enter into an Authorised Guarantee Agreement (AGA) as a condition of giving consent to the assignment. An AGA is a legal agreement under which the outgoing tenant guarantees the performance of the assignee’s obligations under the lease.
This means that even after the lease has been assigned, the outgoing tenant may remain liable if the assignee fails to comply with the lease terms. For example, if the assignee defaults on rent payments, fails to pay service charges, or breaches any other lease covenants, the landlord may seek recovery from the outgoing tenant under the AGA.
An AGA will usually remain in effect until the assignee subsequently assigns the lease to another party. At that point, the outgoing tenant’s liability under the AGA generally comes to an end.
An AGA can leave an outgoing tenant exposed to a significant financial risk; it is important to consider its terms carefully during negotiations. Where the incoming tenant has a strong financial covenant and a proven ability to meet the lease obligations, it may be possible to negotiate limitations on the scope of the guarantee or, in some circumstances, avoid the requirement for an AGA. Specialist legal advice should always be obtained before proceeding with an assignment.
Underletting: Becoming a landlord yourself
Underletting, also known as subletting, differs fundamentally from an assignment. Instead of transferring your lease to another party, you grant a new lease (an underlease) to a third party, known as the subtenant, while retaining your own lease with the landlord (the headlease).
As a result, you take on the role of a landlord in relation to the subtenant, whilst remaining the tenant under the original lease. This creates two separate relationships: one between you and your landlord, and another between you and your subtenant.
The key point is that your obligations to the landlord do not change. You remain fully responsible for complying with all terms of the headlease, including the payment of rent, service charges, insurance contributions, repair obligations, and any other tenant covenants.
This means that if the subtenant fails to pay rent, breaches the terms of the underlease, causes damage to the property, or becomes insolvent, the landlord will address this to you for compliance with the lease obligations. You would then need to pursue the subtenant separately to recover any losses or enforce their obligations.
Most commercial leases contain restrictions on underletting and often require the landlord’s prior written consent before an underlease can be granted. Many leases also prohibit partial underletting or impose conditions on the terms of any underlease, such as requiring the sublease rent to be at or above market value.
Particular care should be taken where only part of the premises is to be sublet. Many commercial leases either prohibit partial underletting or allow it in limited circumstances.
Although underletting can be a useful way of reducing occupation costs or generating income from surplus space, it does not provide an exit from the lease. Unlike an assignment, where the lease is transferred to another tenant, underletting leaves the original tenant fully liable to the landlord throughout the term of the headlease.
A note on Security of Tenure
When granting an underlease (sublease), it is important to consider whether the subtenant will benefit from the statutory security-of-tenure provisions in the Landlord and Tenant Act 1954.
Under the Act, a business tenant occupying premises for its business generally has the right to remain in occupation after the contractual expiry of the lease and may also have the right to apply for a new lease on similar terms. These protections are known as ‘security of tenure’.
For a tenant granting an underlease, these rights can create significant practical difficulties. If the subtenant acquires security of tenure, they may be entitled to remain in occupation even after the underlease has expired. This could prevent the tenant from recovering possession of the premises when required.
To avoid this issue, many commercial underleases are ‘contracted out’ of the security of tenure provisions of the Landlord and Tenant Act 1954. Contracting out removes the subtenant’s automatic right to remain in occupation or seek a renewal at the end of the term.
However, contracting out can only be achieved by following a strict statutory procedure before the underlease is granted. This process typically involves the landlord serving a formal warning notice and the proposed subtenant signing a declaration acknowledging that they are giving up their statutory renewal rights.
Failure to comply with the statutory requirements can have serious consequences. If the contracting-out procedure is defective or omitted, the subtenant may unexpectedly acquire security-of-tenure rights.
For this reason, tenants considering underletting should seek specialist legal advice and ensure that the contracting-out procedure is carried out correctly before the underlease is completed.
How Dudden Law can help
Navigating assignment, underletting, and alienation clauses requires careful attention to the specific terms of your lease and a clear understanding of the liabilities you carry before, during, and after any transaction.
Myself and the commercial team at Dudden Law, Silver Welsh Law Awards winners 2025, advise businesses across Cardiff, South Wales, and beyond on commercial property matters; whether you are looking to exit a lease early, take on new premises, or simply understand what your lease permits