Commercial Leases: Assignment vs. Sublet

Today it is very common that when a business merges with another business or relocates to another location, that that business will still be stuck with their old location’s lease. Other instances in which a company will seek to assign or sublet their commercial lease is when a company outgrows its commercial location or cannot make their lease payments timely. In all of these situations it is very common for a business to try and assign or sublet their commercial lease.

Assignment of a lease refers to when one party of the lease transfers all the interest and obligations of the lease to a third party. Typically in commercial settings, a commercial tenant will assign their interest in the lease to another commercial tenant. Additionally, a landlord may also assign their interest in the lease to another landlord.

However, many commercial leases will include restrictions on the ability to assign. Thus, it is important that you review your lease in order to determine if assigning your lease is possible. Your lease will note all of the rights that you, as a commercial tenant, maintain over a property.

In general, most consumer protection laws that apply to residential leases do not apply to commercial leases. However, depending on your state laws, restrictions on assignment of commercial leases may be valid if such restrictions are deemed “reasonable.”

What Does It Mean to Sublet a Commercial Lease?

A commercial sublease occurs when a company transfers a portion of their lease rights to a third party for a temporary period. As a company, you may either sublet a portion of your office space while you continue to work in the same space, or sublet the entire office location until the end of the lease or a period of time.

For example, suppose that a company is seasonal, such as a Halloween store. If they have signed a year-long fixed lease term, they may seek to sublet the property for the 8 months in which their store is not operational in order to generate income to pay rent.

It is important to note that when subletting, the original tenant (the “sublessor”) is still obligated to the landlord for the terms of the lease. This means that the sublessor maintains “privity of estate” and “privity of contract” with the landlord. The sublessee, or the person that utilizes the lease for a temporary period of time, is only liable to the original tenant for the lease, not the landlord.

To clarify, the original lease between the original commercial tenant and the landlord remains throughout the sublease period, and the original tenant is responsible for the new tenant. This means that the sublessee would go to the original tenant with any concerns regarding the rental property and pay rent directly to them. Subleases have become increasingly popular for big box retail stores who seek to lease corners of their facility to smaller retail stores. They are also popular for startups that do not have enough capital to lease an entire unit, and prefer to cut costs by sharing an office space with other companies.

For instance, in grocery stores or shopping centers you may see nail salons, ophthalmology services, cell phone repair shops, banks, or even food vendors that are subleasing from the main store.

Other reasons for subleasing or seeking out a sublease include:

• Lower Rates: Rates for commercial subleases, especially short-term ones, may be less than lease rates;
• Flat Rental Payment Structure: Commercial lease often has a flat rental payment structure with no unusual surprises;
• Fewer Obligations: In a commercial sublease, the sublessee usually has limited obligations to repair and maintain common areas;
• Better Bargaining Position: A sublease may put the sublessee in an advantageous position when it comes to negotiating a new lease with the landlord directly (i.e., when the main lease ends);
• Less Complex Lease: Commercial subleases are usually not as complex as commercial leases; or
• Additional Income: As noted above the most common reason for subleasing is to gain an additional source of rental income in order to make or lessen your lease payments.

As can be seen, there are numerous advantages for subletting or seeking out a sublease arrangement as a company. However, there are disadvantages for subletting your lease, such as being on the hook for any missed or late payments from your sublessor that may cause you to default on your lease with the landlord. Further, as noted above, as the sublessor, you are responsible for maintaining the location and providing repairs.

However, if in the lease the landlord has a duty to make repairs, then as the sublessor you will act as the intermediary to ensuring that the repairs are done timely, meaning that as a sublessee repairs may be delayed.

Should I Hire a Lawyer If I Want to Sublet or Assign My Lease?

In sum, assigning or subletting your lease may be a great option for companies today. Assignment of a lease may be a better option for companies seeking to move away from their office location permanently; however, subletting may be a superior option for companies seeking to generate an additional source of income in their larger location.

As opposed to an assignment of a lease, which allows the original tenant to completely transfer their full lease interests to a third party, subletting a lease causes the original tenant to still be on the hook for repairs and payments from the third party to the landlord. As can be seen, commercial lease agreements can be very complex. Thus, it may be in your best interest to consult with an experienced and well qualified real estate lawyer to help you understand your options for assigning or subletting a lease. A licensed real estate attorney will be able to guide you through the process of assigning or subletting your lease and ensure that your interests are taken care of.