On occasion, a commercial real estate tenant finds that it’s necessary to end a commercial lease earlier than the agreed upon term.
Whether the business has outgrown the space and needs to move on, or is having trouble keeping up with the rent, tenants can choose from two options that will transfer use of the property and responsibility for the rent to a new tenant. Depending upon the landlord’s requirements and the tenant’s situation, either a sublease or an assignment of the lease can be the way to go.
The first thing guiding the choice should be the terms of the original lease. It may include provisions for subleasing or assignment. If so, the landlord is agreeable to some sort of transfer, and if not, the tenant will need to discuss the possibility with the landlord.
There are some important distinctions to be made between subleasing and assignment. Let’s take a look at those, as well as pros and cons of each strategy.
In a sublease, the tenant (with permission of the landlord) agrees to give use of the space to another tenant, who will in turn pay rent directly –not to the original landlord. It transfers rental rights for whatever portion of the lease designated to a third party. This can be temporary or run for the remaining term of the original lease.
This is a popular option for cash-poor startups looking to save money by sharing office space with other entrepreneurs. It helps tenants to find more suitable space immediately, rather than waiting out the lease.
The cons for this approach include the fact that tenants will be adding the work of managing their subtenant. The tenant also still deals with the original landlord, and is legally liable for any damage or violations on the part of the subtenant.
Assignment of Lease
This approach transfers the remaining interest of a lease to a third party. The original tenant is removed from the equation, and a new tenant now deals directly with the landlord. If the landlord will not agree to a sublease, and the tenant is not interested in returning to the property at any point, this may be an acceptable solution.
When the lease has been assigned to a new tenant, it’s critical that the original tenant be released, in writing, from any further financial obligation related to the property. This release is one of the benefits of assignment. The tenant also avoids shouldering the responsibility of managing a subtenant in this scenario.
The downside of lease assignment is that the tenant forfeits all rights to use of the property and cannot choose to return later. Another disadvantage can come when the landlord refuse to release the tenant from all contractual obligations. This can leave the tenant liable for any violations of the agreement on the part of the new tenant.
How is this done?
The first step in either subleasing or assigning a commercial lease is to refer to the terms of the original lease agreement. Some commercial leases include discussion of whether one or both of these operations will be allowed by the landlord. If not, a conversation is in order. If the tenant is in difficulty and may not be able to pay rent, it’s usually in the landlord’s best interest to cooperate with a subleasing or assignment plan.
Once the landlord has agreed, the tenant should provide notice as to when the change will occur, and get the landlord’s approval on the sublease or assignment of lease agreements that will be used.
If the lease has been assigned and the tenant released, the original tenant is now out of the picture. In a sublease situation, the tenant is now obligated to collect rent and respond to the needs of the subtenant, as well as continue the existing relationship with the landlord.
Understanding the differences can make it easier to decide which of these strategies to use. Remember that the decision depends on individual circumstances, and rests ultimately with the landlord.