Assignment and Subletting

What this clause does

Growth rarely lines up with a lease expiration. A major customer takes distribution in house, a merger consolidates two buildings, or you outgrow the space in year three of a seven-year term. This clause is how you get out, or at least how you stop paying for space you are not using.

An assignment hands your entire lease, all of the space for the rest of the term, to a new company that becomes the tenant. A sublease keeps your lease in place while you rent some or all of the space to a subtenant under a separate agreement. With a sublease you collect rent from the subtenant and keep paying the landlord. You now have three parties, two documents, and a chain of responsibility for everything from roof leaks to move-out restoration.

You usually stay on the hook

Many executives assume an assignment or sublease ends their obligation. It usually does not. Unless the landlord releases you in writing, you remain liable if the assignee or subtenant stops paying or damages the building. If a subtenant fails after you have moved into your next facility, you are paying rent on two buildings.

That is why the cleanest exit is sometimes not a sublease at all. In a healthy market, a replacement company willing to sign a longer direct lease at the same or higher rent can give the landlord a reason to terminate your lease and sign the newcomer. The landlord does not have to agree, but a well prepared proposal backed by the new company's financials can make it attractive.

The consent process

Most industrial leases require the landlord's consent to any transfer. The key question is the standard. Consent in the landlord's sole discretion lets the owner refuse for nearly any reason. A standard that consent cannot be unreasonably withheld limits refusals to legitimate concerns, such as the newcomer's credit, a riskier use, or hazardous materials. Push for the reasonableness standard and for a clear list of what the landlord may consider.

Then look at time and cost. Leases often give the landlord a long window to respond, and many let the landlord charge you for its attorney and consultant review with no ceiling. Negotiate a firm response period, ideally with the request treated as approved if the landlord misses it, and a flat or not-to-exceed fee. The fee usually applies to each request, so a deal that falls apart can cost you twice.

Watch for permitted transfer language as well. You want the ability to assign or sublease to a parent, subsidiary or affiliate, or to a company that buys your business or merges with you, without consent, subject to reasonable conditions such as a minimum net worth. Without it, a routine corporate reorganization can technically put you in default.

Recapture and profit sharing

Many landlords want a recapture right, meaning they can take the space back when you ask to assign or sublease. In a rising market, recapture lets the owner re-lease at a higher rent. If you were counting on a sublease to cover part of your cost, recapture can wipe out the plan. Ask that recapture apply only to transfers of most of the space for most of the remaining term, and that you can withdraw your request to avoid it.

Profit sharing is the landlord's other tool. If you sublease for more than you pay, the landlord often takes a share of the excess, commonly half. Negotiate the right to recover your costs first, including brokerage commissions, free rent, improvements and legal fees, before any split.

Unauthorized transfers

Transferring without consent is a default that can let the landlord terminate the lease or raise the rent, and it leaves your subtenant exposed as well. Never let a subtenant move in, even partially, before the landlord has signed its consent. Have a real estate attorney review the transfer section at signing, because this is often the clause you will lean on hardest when plans change.

If you are unsure whether a deal, such as a merger or a shared-space arrangement with a customer, requires consent, ask before you sign it.