Alienation Covenant in Commercial Leases — Assignment, Subletting and LTA 1988

Absolute vs Qualified Alienation Covenants

An absolute alienation covenant prohibits assignment, subletting, parting with possession, or sharing occupation under any circumstances — the tenant has no right to seek or obtain the landlord's consent, and any purported dealing in breach is void against the landlord and may give rise to forfeiture. Absolute covenants are most commonly found in short-term leases, leases of specialist premises, or personal covenants in small business lettings. A qualified alienation covenant permits the tenant to apply for the landlord's consent — and, critically, once the covenant is qualified, the Landlord and Tenant Act 1988 applies. Section 19(1) of the Landlord and Tenant Act 1927 (for leases granted before the 1988 Act came into force) provides that where the lease contains a qualified alienation covenant, an additional statutory requirement applies: the landlord's consent must not be unreasonably withheld. The 1988 Act builds on this by imposing specific procedural obligations on the landlord.

• Absolute covenant: no assignment, subletting, or sharing at all; no right to seek consent; breach is a potential forfeiture event; uncommon in institutional leases
• Qualified covenant: no dealing without the landlord's prior written consent; LTA 1988 applies; consent must not be unreasonably withheld; landlord must give written decision with reasons
• Fully qualified covenant: expressly states consent 'not to be unreasonably withheld or delayed' — the statutory overlay of LTA 1988 also applies; both contractual and statutory protection for tenant
• LTA 1927 s.19(1): for pre-1988 Act leases, implied proviso that consent must not be unreasonably withheld where covenant is qualified; the 1988 Act now provides the procedural framework
• Absolute subletting with qualified assignment: some leases permit assignment (with consent) but prohibit subletting absolutely — different regimes for different types of dealing

The Landlord and Tenant Act 1988 — Statutory Duties

The Landlord and Tenant Act 1988 imposes four key statutory duties on a landlord where the alienation covenant is qualified. First, the landlord must serve written notice of their decision on the applicant tenant within a reasonable time of receiving the application for consent. Second, the landlord must give consent unless there are reasonable grounds for refusal. Third, if the landlord proposes to refuse, they must give written notice setting out the reasons for refusal. Fourth, if the landlord proposes to give consent subject to conditions, they must give written notice of those conditions — and the conditions themselves must not be unreasonable. These duties arise on receipt of the tenant's application — not from any subsequent correspondence or chasing. The time runs from when the landlord (or the landlord's agent) receives the application for consent, together with any supporting information reasonably needed to process it.

• Written notice within reasonable time: landlord must respond in writing within a reasonable time of receiving the application; what is reasonable depends on the complexity of the application (typically 4–8 weeks for a standard application)
• Consent unless reasonable grounds for refusal: the presumption is in favour of consent — the landlord bears the burden of demonstrating reasonable grounds for refusal
• Written reasons if refusing: refusal must be in writing with clear reasons; oral or informal refusal does not discharge the statutory duty
• Conditions must be reasonable: any conditions attached to consent must not be unreasonable; a condition requiring the outgoing tenant to enter into an AGA is generally reasonable; a condition requiring excessive additional security may not be
• Damages for breach: the tenant has a statutory right to damages under LTA 1988 s.4 for breach of the landlord's duties — damages can include the loss of the proposed deal, abortive costs, and any consequential losses

Reasonable Grounds for Refusing Consent

The most litigated question under the LTA 1988 regime is whether the landlord has reasonable grounds for refusing consent to an assignment or subletting. The courts apply an objective test: would a reasonable person in the landlord's position, knowing what the landlord knew at the time of the refusal, have refused consent on those grounds? Ashworth Frazer Ltd v Gloucester City Council [2001] UKHL 59 (House of Lords) confirmed that the reasonableness of the landlord's grounds is assessed as at the date of the refusal — the landlord cannot be saved by post-refusal events or information. Common grounds for refusal that courts have accepted as reasonable include: the financial covenant weakness of the proposed incoming tenant; the proposed use of the premises being in breach of the user covenant; material structural changes proposed by the incoming tenant without appropriate protections; and the landlord's reasonable desire to maintain the character of the building or development.

• Ashworth Frazer v Gloucester CC [2001] UKHL 59: HL confirmed objective test for reasonableness; assessed at date of refusal; post-refusal events do not save an unreasonable decision
• Financial covenant weakness: incoming tenant with insufficient net assets or trading history to support the rent obligations — a strong ground for refusal where the landlord can show the incoming tenant is a credit risk
• Proposed use in breach of user covenant: if the incoming tenant proposes to use the premises in a way that would breach the lease's user covenant, the landlord can refuse on that ground
• Material alterations proposed without adequate protection: proposed structural changes by the incoming tenant without appropriate reinstatement obligations or consent arrangements
• Character of the building: landlord's reasonable desire to maintain the tenant mix or character of a shopping centre or mixed-use development — can be a valid ground, but must be applied consistently

Conditions on Consent

Where the landlord gives consent to an assignment, it is common practice to attach conditions to that consent. The most common condition in a new lease (post-1995 Act) assignment is a requirement that the outgoing tenant enters into an Authorised Guarantee Agreement (AGA) — guaranteeing the immediate assignee's performance of the tenant's covenants. This is generally regarded as a reasonable condition. Other conditions that have been accepted as reasonable include: a requirement that the incoming tenant provides a rent deposit or additional security; a requirement that the incoming tenant installs specified improvements or undertakes agreed works; and a condition that the incoming tenant enters into a direct covenant with the landlord to observe and perform the lease covenants. Conditions that restrict the business activities of the incoming tenant beyond what the existing user covenant already provides for are more likely to be unreasonable.

• AGA condition: requiring the outgoing tenant to enter into an Authorised Guarantee Agreement — generally accepted as a reasonable condition under new leases
• Rent deposit or additional security: reasonable where the incoming tenant's covenant strength is uncertain or where the lease is for a substantial term
• Direct covenant with landlord: requiring the incoming tenant to covenant directly with the landlord to observe and perform the lease covenants — standard and reasonable
• User covenant conditions: conditions restricting the incoming tenant's use beyond the existing user covenant may be unreasonable — the landlord cannot use the consent process to impose new restrictions not in the original lease
• Unreasonable conditions: conditions designed to extract a premium or additional payment from the incoming tenant, or to benefit the landlord commercially at the incoming tenant's expense, are likely to be unreasonable under LTA 1988

Sharing Occupation and Group Companies

In addition to formal assignment and subletting, commercial tenants frequently wish to share occupation of the demised premises with other parties — for example, by allowing a group company or subsidiary to occupy part of the premises. Most commercial leases contain provisions permitting the tenant to share occupation with group companies (as defined by the Companies Act 2006) without formal consent, provided the sharing does not create a legal demise of part of the premises (i.e., it is a licence to occupy, not a sublease). This is an important practical distinction: an informal licence to a group company is generally permitted; a formal sublease to a group company requires the landlord's consent under the alienation covenant. Sharing with non-group companies requires the landlord's consent unless the lease expressly permits it.

• Group company sharing: most commercial leases permit sharing with group companies without formal consent — provided no legal demise (sublease) is created; must be a licence to occupy
• Definition of group company: CA 2006 s.1159 — companies in the same corporate group (holding company / subsidiary relationships); some leases use a broader definition; check the specific lease definition
• Non-group sharing: sharing with third parties who are not group companies typically requires the landlord's written consent under the alienation covenant
• Creating a legal demise: if the group company occupies under a sublease (not a licence), formal consent is required even for group company arrangements
• Scotland: L&T(C)A 1988 applies only in England and Wales; Scottish commercial leases governed by Scots law; consent requirements and remedies for unreasonable refusal differ; take specialist Scottish legal advice

Frequently asked questions