Building Better Leases Series – Assignment and Subletting

Building Better Leases

Before delving into this section, it’s important to understand the difference between an assignment versus subletting.

An assignment of a Lease is a complete transfer of the right to be the tenant under the Lease. The third-party assignee becomes the “tenant” under the Lease, taking over all of the leased Premises for the entire remaining Term of the Lease. The new tenant pays the rent required directly to the landlord and is treated as the tenant under the Lease for all purposes. The catch is that the assignor tenant, unless released from liability by the landlord, remains liable for the obligations under the Lease if the new tenant defaults. In other words, the old tenant can be sued by the landlord if the new tenant fails to perform obligations like Rent set forth in the Lease.

A sublease is an agreement between the tenant as sublessor and a third party as sublessee for all or a portion of the leased Premises. The original Lease between the tenant and landlord remains in place meaning the tenant remains liable for monthly rent under the original lease, while collecting rent from the subtenant under the sublease.

The main difference is that a sublease can be for less than all of the leased Premises whereas an assignment transfers the entire lease for all of the Premises. Furthermore, a sublease is a more involved transaction that requires a full sublease document between the tenant as sublessor and the sublessee. Both the Lessor and the Lessee should be diligent while evaluating and negotiating this section.

Lessor’s consent required

A Lessor has the right to deny consent based upon the proposed use and/or financial condition of the subtenant being considered. An assignment/subletting without the Lessor’s consent is considered a Breach of the Lease. If the lessor chooses to treat it as a Breach, the Lessor has the option, upon giving 30 days of notice, to terminate the Lease or increase the Rent by 10% with 30 days’ notice. Any rental adjustments should also be increased accordingly. In this instance, the Lessees are prohibited from suing the Lessor for punitive damages. Therefore, it’s important that the Lessee complies with the terms of the Lease.

Terms and conditions applicable to assignment and subletting

Lessee’s often believe that they are relieved of their Lease obligations as a result of an assignment or sublease, however this is not the case.

While approval/disapproval of the assignment is pending, the Lessor may accept Rent or performance of the Lessee’s obligations from third parties. The Lessor’s consent is on a case-by-case basis, so the Lessee must get the Lessor’s approval every time they want an assignment or subletting to be reviewed. As part of the process, the Lessee is required to request the Lessor’s consent, provide information regarding the proposed assignee or sublessee’s use, finances, operation and proposed modifications to the Premises, and pay a $500 fee for the Lessor’s consideration of the matter. In addition, the Lessee must provide any other documentation, within reason, that is requested by the Lessor. If the Lessor chooses to deny consent, the Lessee is allowed to request a written explanation as to why. Because it can get expensive, Lessees may want to place a cap on the costs that can be charged back for the Lessor’s use of consultants during the process.

Additional terms and conditions applicable to subletting

The sublessee is responsible for paying their portion of Rent directly to the Lessor. If the collected sublease income is higher than the Rent owed by the Lessee, then the Lessor will refund the difference to the Lessee. The Lessee should direct the sublessee to pay all of the Rent directly to the Lessor. In the event that the Lessee Breaches the Lease, the Lessor is allowed to substitute themselves in as the sublessor under the sublease and assume all the responsibilities of the Lessee. Both the Lessee and the Lessor should be aware of the conditions set forth and understand that the Lessor has the right to be reimbursed by the Lessee for the costs associated with any Breach.