Subletting and Assignment of Lease: What is the Difference?
Have you considered subletting your space? There are several ways to get rid of some or all of your space you lease that you don’t need. You can have language is your lease that simply ask to give up some space. You may elect to turn part of the space back to the landlord if your lease has a clause in enabling you to contract your space or you may have the option to terminate the lease. Today I want to talk about your option to sublet and/or assign your lease. I’ll explain the difference between Subletting and Assigning your lease you’ll what to know the difference and what rights under your lease you have to exercise either option. For lease negotiation purposes, there is usually little difference between subletting and assigning. For that reason, we often lump the two methods together and refer to them as “transfers”.
The difference between subletting and assigning
Subletting: If you transfer just part of your leased space to another tenant, on a temporary or permanent basis, its called a sublease, often times the sublease rate negotiated is below market rents with flexible terms in order to entice someone to sublet your space as apposed to going direct. The person who subleases is called a sub tenant. In a subleasing arrangement the sub tenant pays rent to you, the tenant and the tenant pays rent to the landlord under the same terms and conditions of your lease. If there is a sublease clause in your lease most often the Landlord will have to approve the sublessee and run a credit check just like they would with a normal tenant, the approval of which often is timely. You as the Tenant are ultimately responsible for the performance of your lease.
Assignment: By contrast, an assignment occurs when you transfer all your space to someone else (called an assignee) for the entire remaining term of your lease. (You can instead terminate the lease), which is often preferable if you want to move on and never come back, you’ll look for someone to completely take over the lease-assignment. In an assignment, the new tenant pays rent directly to the landlord Importantly, since you’ve given away all of your interest in the lease, you have no rights to retake the property or to evict the assignee for nonpayment of rent. You have to be careful not to assume that because you sublet your space or assigned the entire lease to another tenant, you’re relived of some or all of your obligations. Often, you’re still responsible for paying the rent if they subtenant or assignee fails to pay and making good on other lease obligations unless the Landlord releases you of financial obligations of the lease. Most landlords prefer that the Tenant buy-out their lease and go direct with a new Tenant rather than doing a sublease or assignment arrangement for a couple reasons
1) Extend the lease beyond the initial maturity date
2) Market conditions most likely changed since the initial lease was signed, the market rents most likely have increased since the original tenant took occupancy.
Here is an example of Subletting/Assignment clause, please note, this language is not a substitute for personalized advice from a knowledgeable real estate attorney, always consult an attorney who is licensed to practice in your state.
Tenant shall have the right to assign its lease or sublet the premises with the Landlord’s prior written consent providing that the Tenant or sub lessee will not violate any other restrictive covenant, then in effect in the center and of which Tenant has notice. It is expressly understood that Tenant shall have the unrestricted right to assign, sublet, license or transfer (hereinafter collectively “Transfer”) any or all of its rights and privileges under the lease.
You should consider both options and the consequences before deciding to subletting or assign your lease. You may find yourself wanting to move back into your space and if you assign your lease you give up that right. If you can’t terminate your lease which is the cleanest and lease complicated solution be sure that any assignee is a rock solid Tenant, or structure the transfer as a sublet, so that if the subtenant falls short, you can at least retake and use the space.
Investing In Commercial Real Estate?
Looking to invest in Arizona Commercial Real Estate? At ICRE Investment Group, we work with commercial investors, property owners, companies, banks, and commercial loan servicers seeking the highest quality of services in the greater Phoenix, Scottsdale, Mesa and Tempe Arizona regions. Contact us for more information.