Commercial real estate jargon 101: Subleasing and assignment
Strong, tenant-favorable sublease and assignment language in a commercial lease is one of the surest methods of securing flexibility within your lease contract. Because it is such a critical issue, your tenant advocate should include comprehensive sublease and assignment language in the initial proposal process as these are key deal terms that should be agreed to in the early stages of negotiations.
As a point of clarification, although often bundled together, subleasing and assignment are very different tools. A sublease creates a new sublandlord/subtenant relationship in which the original tenant enters into a new lease with the replacement tenant (subtenant) and is responsible for playing the role of “landlord” – collecting rent, performing tenant improvements, overseeing the parking situation, etc. An assignment simply replaces the original tenant with the replacement tenant and the lease remains in full force and effect.
There are pros and cons to each method. For example, a sublease provides the ability to generate income in the event the market heats up and the incoming subtenant is willing to pay more than the contract rate. However, in a sublease, the tenant is never actually relieved of his or her lease liability, so if the subtenant defaults, the original tenant is compelled to satisfy the lease requirements. In an assignment, the original tenant is generally relieved of ongoing lease liability, but that also prevents the possibility of upside.
In any event, there are certain elements of any sublease or assignment clause that a tenant must win:
- The tenant must have the right to sublease and the landlord should not be allowed to condition, delay, or unreasonably deny the sublease.
- In the event the landlord requires a fee to review the sublease, the fee should be reasonable and not usurious.
- A tenant must have the right to perform an assignment or sublease to a “related entity” (e.g., an entity acquiring all or substantially all of the tenant’s assets or equity) without the landlord’s consent.
- A tenant must be able to profit from the upside from a sublease (tenants certainly bear the risk of subleasing in a down market).
Most landlords are comfortable with these requests as they recognize they are better off empowering the tenant to have control over his or her destiny. Nonetheless, you get what you negotiate, so do not overlook the Assignment & Subleasing clause in the lease, because if it’s not properly worded, you could have a landlord playing a very significant role in the future of your business!
Tim Rikkers is a principal with Cresa, a corporate real estate advisory firm. Ross Rikkers is vice president of the company.
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