Sublet and Assignment Clauses in Commercial Leases

When you're looking for commercial space, you'll be asking for just the right amount of square footage, for the time period you expect to remain in that location. But pressing business needs (positive or negative) may develop and require you give up part of your rental while you occupy the rest, or to leave before the lease ends and turn the entire space over to someone else. Because you can't anticipate these needs now, you'll want to make sure your lease provides maximum flexibility. You'll want the lease to include a sublet and assignment clause, which gives you a mechanism for turning all or part of the space over to another tenant before the term ends.

Subleases and Assignments: What's the Difference?

Both subletting and assigning involve transferring your lease obligations to another tenant. But there are legal and practical differences between subleases and assignments.

Sublease

If you transfer just part of your leased space to another tenant while you remain on the property, on a temporary or permanent basis, it's called a sublease. If you transfer the entire rental to another tenant for a period of time while you move out, that too is a sublease. For example:

• The warehouse space John rented was too large when his business slowed down. He considered subletting one corner to another tenant for one year, hoping that after that, business would pick up and he'd need the space again. John's partner was less optimistic, and wanted to sublet the corner for the remaining time on the lease.
• Wendy's retail space, devoted to winter sports gear, became a clothing and gear shop for hikers during the summer, sublet by Paul, after Wendy packed away her inventory and stored it elsewhere.

Unless your lease prevents it, you may rent to anyone you like and charge any rent you choose. The person who subleases is called a subtenant. In a subleasing arrangement, the subtenant pays rent to you and you continue to pay the landlord under the terms of your lease. If the subtenant fails to pay the rent, you have the power to terminate the sublease, evict the subtenant, and retake the space, just as your landlord can do to you. And if the subtenant violates any of your lease terms (such as erecting a sign in violation of the sign clause in your lease), your landlord has the right to terminate your lease.

Assignment

By contrast, an assignment occurs when you transfer all your space to someone else (called an assignee) for the entire remaining term of the lease. As with a sublet, you are free to choose your assignee and determine the rent unless your lease says otherwise. In an assignment, the new tenant pays rent directly to the landlord. Importantly, since you've given away all of your interest in the lease, you have no rights to retake the property or to evict the assignee for nonpayment of rent.

Tenant Responsibilities Following a Sublet or Assignment

A sublet or assignment does not relieve you of some or all your responsibilities under your own lease. On the contrary, under either arrangement, you're still responsible for paying the rent if the subtenant or assignee fails to pay, and making good on other lease obligations, such as paying for damages and keeping insurance policies current. (However, when you assign a lease, you may have less responsibility for guaranteeing nonrent duties than when you sublet.) You'll be free of these future financial obligations only if the landlord releases you in writing.

Types of Assignment and Sublease Clauses

Here are the various clauses you may find your landlord's commercial lease.

No Assignment or Sublease Clause

Your landlord's lease may simply not contain an assignment or sublease clause. What then? In most states (Texas is a notable exception), you're entitled to sublease or assign and need not ask for the landlord's permission. Few landlords will present a lease that lacks an assignment or sublease clause, but it does happen occasionally. If so, consider yourself lucky.

Prohibition Against Assignments or Sublets

Your lease may have a short, sweet "No sublets or assignments," period. If that's all there is—no qualifiers such as "without the landlord's consent"—then you can't do it. Of course, if you want to assign or sublet during the life of the lease, you can always approach the landlord and ask to reopen the issue.

Landlord's Reasonable Consent to a Sublease or Assignment

Many leases prohibit subleases and assignments without the landlord's consent, but provide that the landlord will be reasonable when evaluating your proposed sublease or assignment. Courts have developed a fairly uniform way of determining whether a landlord has acted reasonably when evaluating a would-be transferee (sublessee or assignee). When you negotiate the assignment and sublease clause, you and the landlord can place the same standards in your clause. Having these standards spelled out in the lease will help you evaluate a proposed transferee before you even present the applicant to the landlord.

Your lease clause should contain three conditions for acceptance of a sublessee or assignee. If any of the three conditions are not met, the landlord can reasonably say no. Conversely, if the transferee passes all three, a rejection will be unreasonable.

1. Is the transferee financially healthy and likely to conduct a profitable business?
2. Will the transferee use the space according to the landlord's rules and plans—for example, as to how the property is used?
3. Does the transferee have an acceptable business reputation—for example, a positive credit history and clean history (no illegal activities)?
4. The reasonable consent rule gives both tenants and landlords the flexibility and control each needs. If your lease includes this standard for evaluating transferees, you and the landlord need to give some real meaning to terms like "financially healthy." For example, you might agree that the standard of "financially healthy" means that the newcomer has have turned a profit in two of the preceding three years.

This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman.