One of the major milestones for any business owner is the day they sign a lease for their new work space.
However, in any business journey, there may come a time when the space no longer works for you and your business. In the case of business expansion, you can negotiate a new lease for additional space.
But what do you do if your business unexpectedly decreases or there is a downturn in your market sector and your work space is now too big for your business?
In such cases, many business owners will choose to either pursue an assignment lease or a sublease.
To help you better understand these options, this post will review important information when it comes to lease negotiation before moving into a discussion of the main differences between an assignment and sublease.
Leases: negotiate for flexibility
In general, commercial leases are restrictive in nature, particularly when it comes to the fulfillment of the lease. For example, most leases require the consent of the landlord before changes can be made to how the lease will be fulfilled.
One way to address this possible issue it to plan ahead by assessing your business and your business plan in order to negotiate as much flexibility as possible into your lease.
In other words, assess the worst case scenario where your business fails and then work that scenario into your lease.
Examples of how you can work such a scenario in include, but are not limited to,
>Offering to commit only to the first 2 years of a 5-year lease
>Proposing an early termination clause
>Proposing a set dollar amount for damages if you terminate your lease early
>Proposing an assignment lease or sublease clause
The last option may also be available to you if you do not initially work it into your original lease contract.
Assignment Lease vs Sublease
Although at first glance it may seem as though an assignment lease and a sublease will deliver the same results; however, there are many differences between the two types of leases.
What is an assignment lease?
An assignment lease is a complete transfer of a lease from you to another tenant for the remainder of your lease term.
In other words, another third-party becomes the assignee (tenant) for your lease. This type of arrangement gives the new tenant all rights to the leased space, requires them to pay the agreed-upon rent to the landlord, and assigns them liability for the lease and space.
There are some instances where a landlord may insist that you continue to be liable for the lease/rent/space under an assignment lease in case the new tenant does not pay the rent.
What is a sublease?
A sublease is a new agreement between you and a third-party (subleasee) for a portion or all of the leased space.
That means the subleasee will be responsible for paying you rent for the agreed-upon amount for their portion of the space.
However, take note that the original lease between you and your landlord remains in place and does not change. That means you are still liable for the entire rent under your original lease.
It is also important that the term of the sublease either ends before your lease term or on the same day. In this way, there will be no issues with the sublease extending past your lease term.
Which lease type should you choose?
Each lease type comes with its own advantages and disadvantages. However, which type you end up choosing will depend entirely on your business needs, your current lease contract, and your discussions with your landlord.
The key is to plan ahead for such a need as early as possible and to be open and honest with your landlord during discussions should you find yourself in the need to renegotiate your original lease.
Note: This post was originally published on 4/6/16 and has been updated as of 11/19/19.
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Disclaimer: Nothing in relation to the enclosed information should be construed and or considered as legal advice for any individual, entity, case, or situation. The following information is prepared for advertisement use only. The information is intended ONLY to be general and should not be relied upon for any specific situation. For legal advice on your specific situation, we encourage you to consult an attorney experienced in the area of Immigration Law.