Leasehold legal issues

Liability under leases

Liability under leases

The way that leases work is that whoever is the tenant for the time being is directly liable to the landlord for any of the tenants’ obligations under the lease.

  • The only way of changing the situation is for there to be an “assignment” (transfer) of the lease to a new tenant.  The tenant will not however be released from liability unless the lease requires the tenant to enter into an authorised guarantee agreement.
  • Under modern leases, where a tenant transfers the lease they would automatically be released from any obligation.  This release will not arise in the case of a transfer of the lease that was in breach of lease obligations (for example an absolute prohibition against transfer or more commonly a requirement to obtain the landlord’s consent.)
  • Furthermore, it is extremely common for leases to contain a requirement that a transferring tenant must guarantee that the next tenant taking a transfer will comply with lease obligations in such a way that the former tenant will remain liable under the lease obligations almost to the same extent as before.  This is known as an “authorised guarantee agreement”.  [Alienation]
  • In the voluntary sector although it is highly arguable that under many leases an outgoing tenant should not have to guarantee an incoming one.  Often in the case of leases from local authorities, the lease has been granted so that the organisation can carry out a specific function, and not just provide a rental income for the landlord.  [Negotiating leases]
  • Trustees of corporate charities and those involved in other corporations will generally have the benefit of limited liability, which means that if the organisation cannot meet its liabilities, they will not be personally liable.  However sometimes the charity trustees of some charitable organisations are asked to guarantee the organisations’ obligations under a lease. As they are volunteers and do not receive a benefit from the arrangement they should decline to do so. [Personal and limited liability]
  • Trustees of unincorporated organisations will be personally liable under the terms of the leases.  Furthermore, if there is a change of trustees it will be necessary to transfer the lease to new trustees within the terms of the lease, otherwise those who were previously trustees will remain liable under the lease terms.
  • Trustees of unincorporated organisations are entitled to an indemnity from the funds of their organisation for any authorised activities or liabilities they undertake, but that is of little comfort if the charity does not have the funds to indemnify them.
  • A clause should be included in leases that provides that the liability of the tenant is limited to the assets of the charity to protect the trustees of unincorporated organisations.
  • Leases to unincorporated charities that normally require the consent of the landlord to transfer should include an exception with respect to transfers to new trustees.