What are the effects of corporate restructuring on commercial leases?  

Whether you are the landlord or tenant of commercial premises, it is essential that you are aware of the true effects of corporate restructuring which involve a commercial lease.

It is common, for many different reasons, for groups of companies to undertaking corporate restructuring. This may be due to a change in management or ownership of the companies, for tax benefits, or to accommodate a failing business. For whatever reason the restructuring is taking place it is essential to ensure that the changes made are effective.

Guarantor for the tenant

Often, when a commercial lease is taken the Landlord will require the tenant to have a guarantor. The guarantor will also be party to the lease, and will guarantee the Tenant’s covenants and obligations under the lease, essentially being required to step into the shoes of the tenant if they fail to comply with their obligations under the lease.

When companies come to dealing with a corporate restructuring, it can be suggested that the lease be assigned to the guarantor under the lease. This can particularly be considered in circumstances where the tenant company is in financial difficulties, and to avoid forfeiture it is proposed that the guarantor should take an assignment of the lease. Whilst this may seem like an adequate solution, it is not, and must be avoided.

Assignment to an existing guarantor is void

It has been held by the High Court in a recent decision that an assignment to an existing guarantor is void. Such an assignment is considered to be in breach of anti-avoidance provisions contained in applicable statutes, and accordingly will be set aside. The outgoing tenant will remain the tenant, and the assignee will remain the guarantor.

In light of this, it is essential for Landlords to consider the relationship between the parties when granting a Licence to Assign, and in particular to be cautious when dealing with intra-group restructuring. Tenants must also be aware of this application, the effect of which may restrict the scope of their planned corporate restructuring.

If you need assistance with a commercial lease, or a licence to assign, the Commercial Property department will happily be able to assist you, and would be pleased to talk through your requirements.