In today’s ever changing business environment and the constant change of business needs to operate and expand or minimize work space, a company should closely observe its business plan and negotiate flexible terms when negotiating a lease.
Despite of all of the preparation and negotiation, business may unexpectedly increase or for any reason business may drastically decrease. In both cases, a company may find itself stuck with a space that it does not need and or needs additional space to answer the demand of its business. Obviously, there is no problem when the business is expanding because a company can always negotiate a new lease for additional space. The problem is when the business is slowing down and the space is empty and costing the company at least the monthly rental. To stop the loss, many companies sublease or assign their lease(s).
Normally, commercial leases restrict the options of sublease or assignment. Most leases require the landlord’s consent to the assignment or sublease. Companies need to plan ahead by negotiating as much flexibility as possible in the assignment and subleasing clauses of their leases.
One way to address this issue, when negotiating a new lease, is to assess your business and follow your business plan. In other words, assess your worst case scenario in your business within the next few years should your business fail. As a way of leverage in negotiation:
- You may offer to commit to the first two years of the five years lease contract.
- You may propose a set dollar amount for damages if you wish to terminate the lease earlier.
- You may propose to include an early termination clause in your lease contract.
If all of your attempts fail during the negotiation and you are stuck in a lease, a company is left with two options either sublease or assign the lease. As mentioned earlier, many leases require the landlord’s prior consent. If this is the case, a good starting point would be to consult with your landlord and decide on an action plan together.
First impression, the two terms, sublease v. assign, seem to be addressing the same issue and deliver the same result! However, there are many differences between the two terms and the liability associated with each.
Assignment vs. sublease: An assignment of a lease is a uniquely different legal term compared with a sublease. An assignment of a lease is a complete transfer of the right to be the tenant under the lease for the entire term of the lease. As if the original tenant, with the consent of the landlord if required, is relieved from his/her/its liability under the lease. Although in certain cases, the landlord may insist to keeping the original tenant liable should the sublease fail to pay rent. In other words, the third new party becomes, assignee, becomes the “tenant” under the lease, taking over all of the leased premises, substituting for the old tenant. In the assignment setting, the new third party takes over the entire premises. The new tenant pays the rent required under the lease directly to the landlord and is treated as the tenant under the lease for all purposes.
A sublease is a new lease agreement between the tenant and a new third party, called sublessee, for all or a portion of the leased premises. Sublease can also be for the entire term of the original lease or less; it is important that the sublease expires on or before the expiration date of the original lease. The original lease between the tenant and the landlord remains in place, unaffected by the sublease. This means that the tenant remains liable for monthly rent under the original lease, while collecting rent from the subtenant under the sublease, which may be more, less or the same as the rent due under the main lease.
Planning is the key to circumvent any possible future issues in a lease. However, because we are in business and business needs constantly change, if the need arise for a sublease or assignment, we highly recommend collaboration with the landlord to mitigate damages for all parties involved.