Commercial leases come in various shapes and forms, such as retail leases, office building leases, warehouse leases, single tenant building leases, multi-family residential leases and ground leases. The nature of the lease dictates the issues that are of the most importance to the parties thereto. One issue that is fairly common and significant, regardless of the nature of the leasing arrangement, is the issue of assignment and subletting. This article will briefly describe the difference between these two concepts and will outline certain business type issues that are important to both landlords and tenants.
An assignment is the transfer of the tenant’s entire interest in and to the leasehold estate. This bundle of property rights includes the entire term of the lease as well as the entire leased premises. On the other hand, a sublease is a transfer of all or a portion of leased premises for less than the entire term. This distinction has a significant legal impact on the various parties and is critical when a dispute arises under the lease agreement. Typically, in the context of an assignment the original tenant remains in privity of contract with the original landlord but is no longer in privity of estate with the original landlord. On the other hand, in the context of a sublease, the original tenant remains in privity of contract and estate with the original landlord.
Most landlords assume that, if the lease agreement is silent with respect to assignment and subletting, the leasehold interests created by the lease agreement may be freely assigned or subleased at the discretion of the tenant. For this reason, landlords typically start the lease negotiation process with a strict and absolute prohibition of the tenant either assigning or subleasing its interest under the lease agreement.
Depending on the bargaining positions of the landlord and tenant, a strict and absolute prohibition against assignment and subletting probably does not mesh with the overall objectives of the tenant. After the lease has been executed, the tenant assumes all of the contractual risk associated with the lease obligations. However, the tenant will often be concerned about the success or failure of its business operation and how such relates to the space it is leasing and obligations under a lease agreement. Furthermore, most well drafted lease agreements will treat a change in ownership or control of the tenant as an assignment. If the tenant wants to sell its business interest to a third party or wants to reorganize, such activity may be treated as a default under a lease agreement because it is deemed to be an assignment.
In order to address the assignment and subletting needs of a tenant to a commercial leasing transaction, many times the tenant will try and negotiate the right to assign or sublet the premises. This ability to assign or sublet gives the tenant more flexibility to deal with issues in the future that may not have been contemplated when the underlying lease agreement was negotiated. If the landlord agrees to allow the tenant to assign or sublease, the landlord will generally require the tenant to obtain consent prior to such. After all, the landlord entered into the transaction with the original tenant (not the assignee or sublessee) and will want to ensure that any potential assignee or sublessee has adequate credit and can satisfy the obligations imposed by the lease agreement. In addition, the landlord will want to ensure that business of the assignee or sublessee fits within the overall plan and permitted use of the premises. Typically, if the tenant is getting sound advice regarding the terms and conditions of the lease agreement, the tenant will require that the landlord consent to assign or sublease may not be unreasonably withheld. The unreasonableness standard is fairly common and gives the tenant additional protection that the landlord will not arbitrarily withhold consent if the tenant is able to find a sounds assignee or sublessee.
The competing interests of the landlord and tenant in the context of assignment and subletting are undeniable. While the friction between the parties with respect to these issues is often dealt with in accordance to relative bargaining positions of the parties, it is critical for both the landlord, tenant and their respective counsel to understand the legal framework and economic considerations that dictate the negotiation process of the rights and obligations of the parties to a lease agreement as it relates to assignment and subletting.
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