A commercial lease assignment occurs when a tenant transfers all of their interest in a leased property to another party prior to the expiration of the original lease. The original tenant can be released from liability in the event that the new tenant breaches the lease.
Commercial Landlord’s Reasonable Consent to Sublease or Assign
- What Does it Mean to Assign a Commercial Lease?
- What Does it Mean to Sublet a Commercial Lease?
- What is a Sublease of a Commercial Lease?
- Can a Commercial Lease be Assigned or Subleased?
- What is an Approval Clause?
- What are Reasonable Commercial Objections?
- Do I Need a Lawyer if There are Problems with My Commercial Sublease or Assignment?
What Does it Mean to Assign a Commercial Lease?
It is very common when businesses merge or relocate to a new location that they will be stuck with the lease of their original location. In other situations, a company may seek to assign or sublet their commercial lease when they outgrow their commercial location or they cannot make their lease payments in a timely manner.
It is common in all of these situations for the business to attempt to assign or sublet their commercial lease. The assignment of a commercial lease refers to when a party to the lease transfers all of their interests and obligations of that lease to a third party.
Usually, in commercial settings, the commercial tenant will assign their interests in the lease to another commercial tenant. In addition, a landlord may assign their interests in the lease to another landlord.
It is important to note, however, that many commercial leases will include restrictions on the ability to assign. Therefore, it is important for an individual to review their lease to determine if assigning the lease is a possibility.
The lease will outline all of the rights that the commercial tenant maintains over the property. Generally, the majority of consumer protection laws which apply to residential leases do not apply to commercial leases.
Depending on the state laws, however, restrictions on assignments of commercial leases may be valid if those restrictions are considered reasonable.
What Does it Mean to Sublet a Commercial Lease?
Commercial subleases arise when a company transfers a portion of their lease rights to a third party for a temporary time period. A company may either sublet a portion of their office space while they continue to work in that space or they can sublet the entire office location until the end of their lease or for a specific period of time.
For example, suppose a seasonal company, a Halloween store, signed a year-long fixed lease term, they may seek to sublet that property for the 8 months during which their store does not operate in order to generate income to pay the rent. It is important to note that, when subletting, the original tenant, called the sublessor, is still obligated to the landlord for the terms outlined in the lease.
This means that a sublessor maintains privity of estate and privity of contract with the landlord. The sublessee, or the individual or entity that utilizes the lease for a temporary period of time, is only liable to the original tenant for the terms of lease, not the landlord.
In other words, the original lease between the original commercial tenant and the landlord remains effective throughout the sublease period. In addition, the original tenant is responsible for the new tenant.
This means that the sublessee would approach the original tenant with any concerns related to the rental property and would pay rent directly to them. It has become increasingly popular for big box retail stores to sublease corners of their facilities to smaller retail stores.
This is also popular for startups which do not have enough capital to lease an entire unit and, instead, prefer to cut costs by sharing an office space with other businesses. For example, in a grocery store or a shopping center, there may be several other types of businesses subleasing from the main store, including:
- Nail salons;
- Ophthalmology services;
- Cell phone repair shops;
- Banks; and
- Food vendors.
Other reasons a business may desire to sublease or to seek out a sublease may include:
- Lower rates: The rate for a commercial sublease, especially a short-term lease, may be lower than lease rates;
- Flat rental payment structure: Commercial leases often have flat rental payment structures that have no unusual surprises;
- Fewer obligations: In commercial subleases, the sublessees typically have 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, for example, when the main lease ends;
- Less complex lease: Commercial subleases are usually not as complex as commercial leases; or
- Additional income: One of the most common reasons for subleasing is to gain an additional source of rental income in order to make or lessen lease payments.
There are several advantages for subletting or seeking out a sublease agreement for a company. There are, however, also disadvantages for subletting a lease.
For example, being responsible for any late or missed payments from the sublessor that may cause the original renter to default on their lease with the landlord. Additionally, as noted above, as the sublessor, the business is responsible for maintaining the location and completing repairs.
If, however, the lease provides that the landlord has a duty to make repairs, then as the sublessor, the original renter will act as the intermediary to ensure that the repairs are done in a timely manner, meaning that, as a sublessee, repairs may be delayed.
What is a Sublease of a Commercial Lease?
A sublease of a commercial lease occurs when a commercial tenant transfers all or part of their interest in the leased property to another party prior to the expiration of the lease. The original tenant will remain liable for any damages in the event the lease is breached.
Can a Commercial Lease be Assigned or Subleased?
The right of a commercial tenant to assign or sublease a commercial lease is determined by the terms provided in the lease. The terms of a lease may expressly prohibit a tenant from assigning or subletting.
The terms of a lease may also allow a tenant to assign or sublease only with the consent of the landlord or if certain conditions are met. Certain jurisdictions also prohibit landlords from unreasonably withholding consent.
If there is not a provision in the lease stating otherwise, commercial leases can generally be assigned or subleased. It is important to note that the tenant’s ability to assign or sublease a commercial lease can be negotiated at the time the lease is signed or renewed.
What is an Approval Clause?
Numerous commercial leases will contain express provisions stating that the landlord is required to consent to the assignment or sublease of the property if it is reasonable, known as an approval clause. The purpose of these clauses is to protect tenants against liability for damages or risk of forfeiture if the landlord’s consent is improperly withheld.
In general, there must be reasonable commercial objections for a landlord to withhold consent.
What are Reasonable Commercial Objections?
Landlords are permitted to withhold consent for an assignment or sublease based on several factors, including:
- The subtenant’s suitability for the particular locale;
- The subtenant’s suitability for the particular building;
- Legality of the proposed use;
- Nature of the occupancy and whether the proposed use is materially different from the use specified in the original lease; and
- The original tenant’s failure to pay rent.
Do I Need a Lawyer if There are Problems with My Commercial Sublease or Assignment?
Commercial real estate can be very complex. In many cases, commercial leases are drafted by attorneys. If you are a landlord or a commercial tenant who has any issues, questions, or concerns related to a commercial sublease or assignment, it may be helpful to consult with a real estate attorney.
Your lawyer will be able to advise you of your rights and obligations under the lease. In addition, your attorney can represent you in court if necessary.
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