By: LaVonne Torrence Berner
When seasoned businesses are faced with what to do with excess rental space or need to cut costs during a financial downturn, they regularly turn to the assignment and subletting provisions of their lease. However, many new businesses have no idea that such rights exist and can lessen the adverse financial consequences should lease costs become unmanageable. For landlords, lease assignments and subletting can alleviate the expense and hassle of finding a new tenant or pursuing legal action for breach of lease.
In a nutshell, assignment and subletting allow tenants to select another business to assume the tenant’s responsibilities under the lease or to subsidize the tenant’s costs under the lease. In exchange, the new business receives either the right to use the space or a lease with the landlord, including all tenant rights under the lease.
Assignment vs. Sublet
Both assignments and sublets typically involve a third party occupying the leased premises and paying a portion of the rent; however, critical distinctions between the two must be understood to determine which option is feasible.
The term “assignment” refers to a transfer of the lease and all legal rights available under the lease. Accordingly, the transferee will usually assume all of the tenant’s obligations under the lease and can be pursued by the landlord for failing to perform the obligations. In effect, the transferee becomes the new tenant under the lease, legally entitled to all tenant rights and legally responsible for all tenant obligations.
A sublet refers only to a right to use the leased premises. A party who sublets (i.e., a subtenant) has an agreement with the tenant, as opposed to with the landlord. Accordingly, a subtenant does not have a legal interest in the leased premises or legal recourse against the landlord in the event that the landlord breaches the lease. Likewise, the landlord cannot purse a subtenant for breach of lease. A subtenant does not have rights independent of the tenant’s rights. Thus, if the lease terminates, then the subtenant’s rights terminate as well, unless a recognition agreement to the contrary is in place.
With both assignments and sublets, the tenant will continue to remain financially liable for performance of all obligations of the tenant under the lease, unless the landlord agrees to another arrangement.
The Landlord’s Weigh-In
Most commercial lease forms either prohibit assignment and subletting or require the landlord’s consent. When considering requests for assignment and subletting, landlords consider things such as the transferee’s experience, creditworthiness, business reputation, assets and income, and overall fit with the current tenant mix. The landlord wants to ensure that the transferee has capacity and incentive to observe lease terms and that the transferee’s operations will not negatively impact other tenants or the value of the property. A tenant will want to negotiate the parameters for review of assignments and subletting before the need arises. This will usually happen as part of initial lease negotiation.
Assignment and subletting provisions can be beneficial for both landlords and tenants. Landlords can lessen the consequences of a tenant who cannot afford lease obligations while still maintaining the right to determine who operates in the space. With a little planning during lease negotiations, assignment and sublet rights can serve as built in alternatives that mitigate events of lease default.
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