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In the world of commercial real estate and the uncertainty that comes with business, there are often times when tenants are left with a space they don’t need whether its due to relocation, business closures, mergers and acquisitions, company growth, etc. The main problem that you run in is that the rent needs to be paid until the end of the lease term, unless there was a prior agreement allowing the tenant to terminate the lease. In these instances, the tenant is left wondering what the options are to get rid of the space, which is why we have created this assignment vs sublease of a commercial space guide.
Since landlords often require consent for the assignment or sublease, it is important that as a tenant you plan and negotiates ahead of time in order to ensure sufficient notice for the landlord. The result of an assignment and a sublease is practically the same; however, the differences lie in the legal portion of it.
An assignment is when the right to be a tenant for the lease is completely transferred to a different individual or corporation.
This third party now becomes the “new” tenant.
The new tenant is now required to pay the rent and the tenant under all lease conditions.
This means that the assignor tenant is liable for all lease obligations unless the landlord chooses otherwise. The original tenant is essentially giving up all the rights and responsibilities to the lease agreement.
The tenant should be careful of the fact that during the assignment they are liable for the default of the new tenant. In a sense, the original tenant is liable in a second degree.
In the case that the landlord cannot obtain something they need from the new tenant, they have the right to pursue the original tenant as well.
In order to remove this, the original tenant should try to negotiate an automatic release provision to rid themselves of this liability as soon as possible.
A sublease is a new lease agreement that is created between the existing tenant and the third party.
The tenant is now considered to be the sublessor and the third party is the sublessee.
The lease that was signed between the landlord and the tenant at the beginning of the term remains unaffected.
In a sublease agreement, the tenant is required to collect monthly rent payments from the sublessee, which are then passed onto the landlord.
The sublessee is essentially treating the sublessor as their landlord.
A sublease has lots of a flexibility since the rent that is agreed upon between the sublessor and sublessee can actually be less, more, or exactly what is required by the original lease.
A sublease is usually for a specified time and is not a permanent agreement. It can also be for only a portion of the rental unit, not the entire thing.
The process of a sublease is slightly more involved than that of an assignment because a sublease agreement needs to be drafted.
In the event of an assignment or a sublease, the landlord must be aware of and consent to the transaction.
The landlord should be unreasonable in consenting to an assignment or sublease; however, it is important that the landlord is informed of this decision.
Most tenants have the right to sublease their space, however not all leases stipulate that sublet consent shall be given reasonably and without delay.
Regardless of whether you are signing an office, retail, or industrial lease, this is something that should be negotiated at the LOI stage.
The portion of premises involved in an assignment or sublease does not differ. If preferred, only a portion of the rental unit can be used an assignment or in a sublease.
In an assignment, the tenant still must relinquish all rights and obligations of the lease agreement, for that specific portion of the space for the remainder of the lease term.
This results in what is called an “assignment pro tanto”.
The only difference between this and a regular assignment is that the new tenant is only liable for a portion of the rent and the premises.
The assignee now has a relationship with the landlord separately.
This sort of assignment may not favorable for the landlord due to the fact that they may not want to deal with two separate tenants.
There may be issues that arise if a tenant wants to terminate the lease, if either tenant is in a position of bankruptcy, etc. The landlord may not want to deal with such issues.
Depending on your use, the landlord may be within their rights to not provide consent. Trying to share space when you have a restaurant lease is a good example of it just not working well (versus a typical office tenant).
Although the legal factors behind assignments and subleases are different, the final result is the same – a new tenant is taking over all of or part of the premises.