The importance of negotiating the right to sublease or assign your commercial lease (+VIDEO)

February 15, 2018 | Commercial Real Estate

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In the market for commercial space? Chances are you’re focusing your efforts on sourcing a property that suits your current business requirements.

However, in today’s ever-changing economy, businesses often need to upsize or downsize at short notice.

As a tenant, where does that leave you when locked into a long-term commercial lease?

It’s hard to anticipate whether you’ll be faced with breaking a lease before it happens. So, it’s important to keep your contract flexible by negotiating a subleasing and assignment clause into your agreement. This means you’ll be able to transfer all or part of your space to another tenant down the track if the situation calls for it.

What’s the difference between an assignment and a sublease?

Man and woman shaking hands | lease assignment and sublease blog

Lease assignments and subleases are often viewed in a similar light. This is because both bank on a third party taking over a commercial lease. But, there are some differences to consider:

Lease assignment

A lease assignment is when an entire property, including the existing tenant’s rights and interest in the commercial lease, are transferred over to a new party.

When it comes to leasing assignments, the new tenant takes on the rights and responsibilities of the assigning tenant. However, the original tenant is still liable if the new tenant breaches the lease.

Sublease

A sublease, on the other hand, is a separate contract between the original tenant and a subtenant. Unlike an assignment, a sublease only turns over part of a property so that the original tenant shares the rights and responsibilities to the premises.

A sublease may be preferable if a tenant wishes to lease out part of a property to another company. Or, if they need to rent out the entire property for a period within their fixed-term lease. In this case, the sublessee treats the sublessor as their landlord. In turn, the sublessor assumes liability on behalf of the sublessee.

The importance of a lease assignment and sublease clause

Two women having a meeting over coffee | lease assignment and sublease blog

The right to assign or sublet a premises comes down to the language used in the commercial leasing agreement.

If there is no prohibiting or limiting clause, a tenant does not need the landlord’s permission to do so. However, if the contract contains such provisions, the existing tenant needs to get the landlord’s consent. This can prove quite costly for the tenant, who may have to continue to pay rent, even if they no longer occupy the premises.

Our advice

Tenants should try to mitigate their risks upfront. Before signing a lease, or even at the heads of agreement stage, the team at Tenant CS suggest negotiating a clause which requires a landlord to act reasonably in the case of lease assignment or sublease.

Work with a tenant representation specialist

Negotiating commercial lease terms can be tricky (even daunting at times). This is because most businesses only have to do it once every 5-10 years. Being able to negotiate provisions that would not otherwise be included may also prove challenging because landlords prefer not to limit their options.

Luckily, an experienced tenant representative will guide you through the lease negotiation process so your needs are met every step of the way. So, the next time you face a lease negotiation, let Tenant CS balance the playing field. Get in touch today!

You can also read about some of the benefits of commercial subleasing here.

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The Author

Tim is the Managing Director of Tenant CS and is a member of the Tenant CS tenant representation services team based in Sydney.

With a real estate career spanning nearly 30 years, Tim is an expert in lease exit strategies, negotiations, aligning property with business requirements, navigating approval processes and aligning senior executives with corporate strategy.

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