Sublease Vs. Assignment of an Office Lease

Definition: A sublease is a agreement between an original tenant (lessee) in an office space and a new tenant (subtenant or sublessee). The agreement between the landlord and the original tenant remain in force and governs the terms in the sublease.

Definition: Assignment of an office lease is the transfer by the original tenant (assignor) of their rights to a sub-tenant (assignee) to use the leased property. However, the assignor remains liable under the original lease contract.

In an office lease assignment, the tenant assigns its rights and obligations under the lease to a third party (the assignee), and the assignee agrees to undertake such obligations. A sublease is, essentially, a second lease between the tenant and a third party (a subtenant). Under a sublease the tenant is in the position of a landlord and the subtenant is in the position of a tenant. Neither the sublease nor the assignment of lease can transfer to the subtenant or assignee, respectively, any rights greater than the tenant had under the lease. For example, if the lease only allowed the use of the leased premises as an office, the sublease or assignment of lease could not allow the leased premises to be used as a warehouse, absent further consent from the landlord.

A transfer of the entire premises subject to the lease for the remainder of the lease’s term is generally considered an assignment of the lease. A transfer of only part of the premises or for only part of the remaining term of the lease is generally considered a sublease. The first step in determining whether to sublease or assign a lease is to review the lease carefully. Many leases prohibit subleases or assignments of leases without first obtaining the landlord’s consent. Some leases also provide standards for the landlord to grant or withhold consent, require that the tenant pay the landlord a fee so that the landlord can decide whether or not to grant consent, and stipulate documents the tenant must give the landlord related to the proposed assignee or subtenant, such as financial statements.

In addition, some leases give the landlord a specified period of time within which to decide whether or not to consent to the assignment or sublease, and such time should be factored into the negotiation between the tenant and the proposed assignee or subtenant if occupancy by a certain date is necessary. Or, the lease may grant the landlord a right to recapture the part of the premises for which the tenant seeks consent (i.e., the landlord can terminate the lease for that part of the leased premises). Some leases even require the tenant to provide the landlord with all or part of any excess rental profits received by tenant from an assignee or subtenant above what the tenant is obligated to pay in rent to the landlord under the lease.

Once you understand exactly what your lease allows and requires, it’s time to determine whether a lease assignment or a sublease is the most appropriate arrangement. For an assignment, the tenant’s obligations and rights under the lease pass to the assignee. The assignee has what is called privity of contract with the landlord: the landlord and the assignee can enforce the respective rights directly against each other. The original tenant, however, remains liable under the lease unless the landlord releases the tenant as part of the assignment of the lease. So, if the assignee fails to pay rent due under the lease, the landlord could seek collection of such rent from the tenant even though the tenant is no longer in possession of the leased premises.

With a sublease, though, unless the landlord expressly agrees otherwise, there is no privity of contract between the landlord and the subtenant. The landlord and subtenant have no direct contractual rights and obligations with respect to each other, unless the landlord’s consent document provides differently. Therefore, if the landlord is not providing services required under the lease, the subtenant has no direct contractual ability to force the landlord to perform. Instead, the subtenant must request that the tenant enforce the tenant’s right and cause the landlord to perform. If the sublease does not address this enforcement issue, the tenant may not be willing to undertake such activities against the landlord on the subtenant’s behalf. With either an assignment of the lease or a sublease, the tenant normally remains liable to the landlord for payment of rent and all other obligations under the lease. So a final—though perhaps most crucial—element in this process is to carefully evaluate the potential assignee or subtenant. Thorough due diligence will help lay the groundwork for a mutually satisfactory lease arrangement.

 

Content is provided by SwiftLease leasing agents.

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