A commercial lease is a written contract that is used when a commercial tenant rents space from a landlord. Commercial real estate law is the area of law that governs commercial leases and commercial tenant and landlord rights.
Similar to other types of leases, a commercial lease gives a commercial tenant the right to occupy the space and conduct business activities for a specified period of time. These commercial tenant rights are in exchange for the commercial tenant making monthly rent payments to the landlord.
A commercial lease also guides both parties regarding their legal rights and responsibilities associated with the commercial real estate transaction.
The most common example of a commercial lease would be when a tenant leases business property, such as:
- An office space;
- A standalone retail space;
- A restaurant;
- A retail store located in a mall or other similar shopping center.
Depending on the specific type of commercial lease that the parties enter into, the lease agreement will provide instructions, such as which party is responsible for making repairs and which party is liable for paying real property taxes on the space.
An assignment of a commercial lease refers to when one commercial party of the lease transfers all the interest and obligations of their lease to another third party. Generally, in a commercial setting, a commercial tenant will assign their interest in their commercial lease to another commercial tenant. Similarly, a landlord to a commercial lease may also assign their interest in the lease to another landlord.
It is important to note that many commercial leases will include restrictions on the ability of a commercial tenant to assign their lease. As such, it is important that commercial tenants review their lease in order to determine if assigning their lease is possible. A commercial lease will note all of the rights that the commercial tenant maintains over the commercial property, including assignability of the lease.
Additionally, it is also important to note that most consumer protection laws that apply to residential leases do not apply to commercial leases. However, depending on the state laws in which the commercial lease was entered into, restrictions on assignment of commercial leases may be valid if such restrictions are deemed “reasonable.”
What Is a Sublease of a Commercial Lease?
A sublease of a commercial lease occurs when a commercial tenant transfers a portion of their lease rights to a third party for a temporary period. A commercial tenant may either sublet a portion of their commercial space while they continue to work in the same space or sublet the entire commercial location until the end of the lease or a period of time.
For example, suppose that a company is a seasonal commercial business, such as a Halloween or firework store. If such a company has signed a year-long fixed lease term, they may seek to sublet their commercial property for the 8 months in which their store is not operational in order to generate income to pay rent on the commercial space.
It is important to note that when subletting, the original commercial tenant, known as the “sublessor,” is still obligated to the landlord for the original terms of the commercial lease. This means the sublessor maintains “privity of estate” and “privity of contract” with the landlord. The sublessee, or the person that intends to utilize the lease for a temporary period of time, is only liable to the original commercial tenant for the lease, not the landlord.
In other words, the original lease between the original commercial tenant and the landlord remains in full effect throughout the sublease period. Additionally, the original commercial tenant is now responsible for the new tenant. This means that the sublessee would go to the original tenant with any concerns they had regarding the rental property, as well as pay rent directly to them.
Subleases have become increasingly popular for big box retail stores that seek to lease corners of their commercial space to smaller retail stores. They are also popular for startups that do not have enough capital to lease an entire commercial space and prefer to cut costs by sharing a commercial 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 big box store.
Other common reasons a company may seek out a sublease include:
- Lower Rental Rates: Rates for commercial subleases, especially short-term subleases, are typically less than standard commercial lease rates;
- Flat Rental Payment Structure: Commercial subleases often have 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;
- Less Complex Lease: Commercial subleases are usually not as complex as original commercial leases; or
- Additional Income: As noted above, the most common reason for subleasing is for the original commercial tenant to gain an additional source of rental income in order to make or lessen their lease payments.
Can a Commercial Lease Be Assigned or Subleased?
As mentioned above, whether a commercial tenant may sublease or assign a commercial lease will be governed by the original commercial lease that was entered into by the commercial tenant and the landlord. Once again, the terms of the commercial lease may expressly prohibit the commercial tenant from subletting or assigning their lease entirely.
The lease terms may also allow the tenant to sublease or assign their commercial lease only with the landlord’s consent or if certain conditions have been met. Many states and local jurisdictions prohibit a landlord from withholding consent to assign or sublease a property if the reason is unreasonable.
In the absence of a provision in the executed commercial lease stating otherwise, a commercial lease can generally be assigned or subleased. As such, the ability of a commercial tenant to sublease or assign a commercial lease should always be discussed and negotiated prior to signing or renewing a commercial lease.
What Happens if I Breach the Lease Through Subletting or Assignment?
Similar to a commercial tenant’s ability to assign or sublet their lease, the penalties for breaching the lease will typically be governed by the terms of the commercial lease that was entered into by the tenant and landlord.
In addition to any legal remedies for breaching the lease, the landlord or tenant may also recover any contractual damages caused by the other party’s breach of the original lease terms. The non-breaching party may also seek to terminate the lease agreement altogether.
Do I Need a Lawyer for My Commercial Sublease or Assignment Issue?
As can be seen, assigning or subletting a commercial lease may be a great option for companies seeking to move away from their commercial location permanently or to generate income.
However, commercial lease agreements and contracts can be very complex. As such, it may be in your best interests to consult with an experienced real estate lawyer to help you understand your legal options for assigning or subletting a lease. An experienced real estate lawyer will be able to guide you through the process of assigning or subletting your commercial lease and ensure that your legal position is protected.
Finally, an attorney will also be able to represent you in court, as necessary, should a dispute arise regarding assigning a commercial lease.