Major shifts in how businesses operate (remote work, business digitalization, and e-commerce are just a few examples), coupled with interest rate increases that haven’t been seen in decades, require that commercial lease tenants remain as flexible as possible to better navigate the fast-changing business landscape. Two tools available to tenants in this regard are assignment rights and sublease rights. Whether the need is to downsize, expand, or relocate, negotiating favorable assignment and sublease rights in a commercial lease can serve as a crucial lifeline for a business should the need arise.
Assignment
With a lease assignment, the original tenant, the “assignor,” transfers all of its rights and interest and delegates its obligations in and under the lease to a third party, the “assignee.” The assignee, in turn, accepts such transfer and assumes the original tenant’s obligations under the lease, essentially stepping into the shoes of the original tenant for the remainder of the lease term. Thus, the assignment creates a direct relationship between the assignee and the landlord, and the assignee has the exclusive right to use and occupy the premises under the lease. It’s important to note, however, that absent an express release from the landlord, the original tenant (and any guarantors) will typically remain liable to the landlord under the lease. Moreover, tenants should bear in mind that certain rights contained in the original lease, such as renewal and expansion options, may not automatically extend to an assignee.
Sublease
In the case of a sublease, the original tenant retains some of its interest in the lease and “subleases” all or a portion of the premises to a new “subtenant.” A sublease creates a sublandlord-subtenant relationship between the original tenant and the subtenant. It does not, however, create a contractual relationship between the landlord and the subtenant. The original relationship between the landlord and the sublandlord (i.e., the original tenant) remains intact, and the original tenant remains liable for its obligations under its lease, including rent payments.
Landlord’s Consent
Generally, if a lease does not contain any restrictions on the tenant’s ability to assign the lease or sublease the space, the tenant has the unrestricted right to do so at will. Practically speaking, most leases will contain restrictions limiting such ability. Some common examples of these restrictions include a financial review of the proposed assignee or subtenant, landlord fees, the landlord’s right to recapture the premises, profit-splitting arrangements, and, perhaps the most common, the landlord’s written consent requirement. Leases may contain any number of assignment and sublease restrictions, and they are often included as conditions to the landlord giving its consent. It should be noted that assignment and sublease, though often paired together in a lease, are distinct concepts, and a restriction on one will not necessarily restrict the other.
If the lease requires the landlord’s written consent for assignments and subleases, absent any limiting language, the landlord may arbitrarily withhold its consent for any or no reason. To counteract this, a tenant should, at a minimum, try to negotiate for the landlord’s consent not to be “unreasonably withheld, conditioned, or delayed.” To the extent that a landlord’s consent may not be “unreasonably withheld,” a landlord may only deny consent based on objective factors (e.g., the financial responsibility of the proposed assignee or subtenant, the legality of the proposed use, or the nature of the occupancy). If the lease is silent on what constitutes “reasonable,” what is “reasonable” will ultimately be decided by a court based on the facts.
Another variable, among many, that must be considered is the timing of the consent. In today’s fast-paced world, a landlord’s delay in giving its consent could derail a deal or cause a potential assignee or subtenant to move on to other opportunities. To provide a level of certainty, a tenant may want to request a specific timeframe within which the landlord must respond. Of course, as with every negotiation point, the leverage of the tenant will determine whether the landlord accepts such a term and the specified timeframe.
While this article provides a quick introduction to commercial lease assignment and sublease rights, as one might expect, there are a host of factors that must be considered when entering into a commercial lease and, likewise, planning for possible exits. Trusted counsel can assist in planning for these considerations and contingencies.