Not a clean getaway

If you have a leasehold pub (or any leasehold commercial premises), selling the lease on to a new tenant does not end your potential liability.

Even though the landlord will insist on approving the new tenant before consenting to the transfer of the lease, he or she will also expect you, as the outgoing tenant, to stand as personal guarantor for the new tenant: either explicity under an “Authorised Guarantee Agreement” or, in the case of an “old” (pre-1996) lease, automatically as a result of “privity of contract”. The jargon is not what is important – the fact is that, as outgoing tenant, you will normally remain liable if the new tenant defaults, sometimes until the lease expires – or even beyond!

There is not much you can do to stop this. Some landlords will let you buy your way out of this – usually at a hefty price. Insurance is, in theory, available, but the need to prove the new tenant’s finanmcial strength and the amount of the premium usually makes this impractical. In most cases, you have no alternative but to accept the risk, counting off the days until the lease expires, and hoping the new tenant does not make a complete mess of the business.

What happens if he does default, and the landlord comes to you for rent areas, the cost of repairing dilapidations, etc? Assuming you have assets you don’t want to lose through bankruptcy, you either try to do a deal with the landlord, or you ask for an “overriding lease”. This is a lease that the landlord grants to you, subject to the occupying tenant’s existing lease, making you that defaulting tenant’s landlord – you become the meat in the sandwich between the freeholder and the occupying tenant. The price of doing this is to pay the occupying tenant’s debt to the freeholder and to ensure the tenant’s obligations are fulfilled for the rest of the lease.

One way of doing this is to try to manage the occupying tenant so as to make a success of his or her business, but the prospects of that succeeding are remote. More likely you will want to evict that tenant, run the business directly to build it up again and, in due course, sell it on to a new tenant – having to guarantee that tenant’s performance, too!

Being a tenant can be bad enough, but you don’t get off the hook simply by selling the business on – you can so easily be dragged back from your comfortable retirement if your buyer cannot cut the mustard

Comments