In commercial real estate, business tenants may sublet or assign space to help with rental costs and to avoid being penalized for ending their commercial lease earlier than a fixed term allows.
Whether a company has simply outgrown its office space or cannot make ends meet, transferring lease rights to a third party may be the only solution to fulfilling the obligations of their tenancy.
Laws regarding subleases and assignment vary by state. Some states do not allow any form of transfer unless the landlord consents. For this reason, it's important to understand your options and whether you are legally entitled to transfer a lease according to your state law, your landlord, and the Commercial Lease Agreement COMLSE .
How does subletting differ from assigning a lease? Below are the steps involved with each so you can determine which alternative is best for your company's commercial work space.
Subleasing Commercial Property
A sublease means to transfer a portion of your rental rights to a third party for a temporary period. You can either sublet a portion of the space while you continue to work, or lease the entire rental unit until the end of your lease or until your return.
For example, let's say you run a seasonal business for eight months of the year, but you are signed onto a two-year fixed lease term. If your landlord consents, you may sublet the property for four months of the year to generate income to pay rent until you return.
The original (master) lease between you and your landlord still stands during this period, but you are now responsible for a new tenant. Typically, they would pay you rent directly and come to you with any issues concerning the rental property. The full details of your relationship would be dictated in a Sublease Agreement.
Subleases are increasingly common for big box stores who lease corners of their facility to smaller retail locations, or similarly for startups who don't have much capital and prefer to cut real estate costs by sharing an office with other entrepreneurs.
Steps to Subleasing Commercial Property
Subletting a commercial property is similar to assigning one, yet both transfer methods have very different outcomes.
Below are the steps involved in subletting a commercial rental space from a tenant's point of view.
1. Refer to your Commercial Lease Agreement. Before you can consider subletting your office or warehouse space, you must refer to your Commercial Lease Agreement to see if there is a clause stating your right to do so.
Often, there will be a term detailing your right to transfer a leasehold, although it may require written consent from your landlord. If there is no clause stating the landlord's policy on subleasing, consult with them about your options.
2. Provide notice. You may be required to provide advance notice to your landlord that you are transferring rights to another renter. If your lease clearly states your ability to transfer, adhere to the notice time mentioned.
3. Find a tenant. If possible, screen tenants until you find a suitable renter. Because you are liable for their tenancy, it's vital to make sure they have a reliable renting history.
4. Draft and sign a Commercial Sublease Agreement. Once you have found a trustworthy prospect, you must draft a Commercial Sublease Agreement to address the terms of their tenancy. You are now referred to as the sublandlord, and the new tenant becomes the subtenant.
As mentioned, the master lease still stands between you and your landlord, but you are now responsible for the subtenant's tenancy. While most of the terms in the Sublease Agreement will mirror the lease, the sublandlord has flexibility in determining several aspects, such as rent/utility price, insurance, damage deposit, improvements, lease term (automatic renewal or fixed), property purpose, inspections, and any other additional clauses. Discuss the terms of the sublease with your landlord to ensure they approve.
For arrangements that involve subletting a portion of your commercial space, ensure the space is clearly described in the sublease.
Sign the agreement with the subtenant and restate the terms to confirm their acknowledgment and understanding of the tenancy.
5. Carry out the sublease. As the sublandlord, you are liable for the subtenant. For example, you are responsible for collecting rent and for any damage caused during their tenancy.
In addition, the subtenant would contact you to take care of any of the landlord's obligations, and it would then be your job to approach the landlord. Essentially, there is little to no legal relationship between the subtenant and landlord.
Pros to Subleasing:
- You are able to quickly transfer partial rights of a commercial property to save money on rent expenses. This will prevent you from breaking a lease term, or having to pay out the remainder of the lease.
- You get to be flexible in your sublease contract.
- If you are sharing a space, you may benefit from shared resources or customers, networking, reduced carbon footprint, and workplace diversity.
Cons to Subleasing:
- You may be adding to your workload by managing a tenant, in addition to your own landlord-tenant relationship.
- You are liable to the landlord for damages or lease violations that occur from the sublease.
Assigning a Commercial Lease
Assigning a commercial space means to transfer the remaining interest of your lease to a third party.
For example, if your business needed to downsize, yet you were locked into a fixed term with no option to sublease part of the space, you may be granted the option to assign the lease to another tenant. Contrary to subletting, you do not plan to return to the space.
After you have assigned the lease to a new tenant, you should get the landlord to release you of financial obligations via writing in order for you to be free from any future liability. Otherwise, you may be held responsible if the third party does not adhere to their obligations.
Steps to Assigning a Commercial Lease
Similar to subletting in the initial stages, here are the steps to assigning a lease. Please note the process may differ depending on your location.
1. Refer to your Commercial Lease Agreement. Like a sublease clause, there should also be a statement in the original commercial lease addressing whether a tenant can assign the remainder of a lease to a third party. The clause may require you to seek written consent RCNSTA from your landlord.
If there is no clause, consult with your landlord about the option to assign your lease, and provide them with a notice of assignment.
2. Find an assignee. The new tenant is called the assignee and you are the assignor. As assignor, you have passed over your tenancy rights to the new tenant. In most cases, they will be held to the same terms as the original lease.
3. Sign a Lease Assignment Agreement. Draft a Lease Assignment to hand over your rights to the new tenant. It should include the terms of the assignment and should include a copy of the master lease.
4. Liability and release. Although you have assigned your interest in the commercial rental space to the assignee, you may remain responsible for the performance of the property to some degree. Unless the landlord offers you a release from all contractual and financial liabilities, you can be liable if the assignee doesn't fulfill their obligations.
5. Assignee assumes possession and interest. At this point, the assignee is the new tenant and deals directly with the landlord.
Pros to Assigning a Lease:
- If you need to relocate or downsize your business, or you're simply unable to pay your rent, assignment can relieve you of your lease obligations.
- You do not have to manage a subtenant, as they will be in direct contact with the landlord.
- If released, you incur no liability for the assignee.
Cons to Assigning a Lease:
- You assign all lease rights to another tenant, which means you may no longer return to the space.
- If you have not been released by the landlord, you may still be liable for the new tenant.
Should You Sublet or Assign a Commercial Lease?
It's important to remember that the decision to sublet or assign a commercial property remains with the landlord. Generally, they prefer stable income and knowing who their tenants are. However, landlords may be willing to allow a transfer if your business is experiencing a dip in revenue and you need to ensure that the rent will be paid on time, and in full.
Discuss transfer options with your landlord prior to signing a Commercial Lease Agreement. It can come in handy to have pre-approved sublease or assignment options should you need to transfer lease obligations permanently or temporarily in the future.
If both options are available to you, weigh each with careful consideration.
Temporarily transferring some of your rights may be the best course of action if you are seeing slow sales, traveling, or need to sublease a portion of your office space to meet rent until the lease is up.
Keep in mind that a sublease arrangement requires more work on your part because you are essentially keeping your existing arrangement and adding another one on top of it. This means you take on some responsibility. It also means you can designate the sublease terms, so long as they do not contradict or override any boundaries in the master lease.
Conversely, assigning a commercial space may be the better option if you simply cannot afford your rent and need someone to take over the lease immediately. Just note that this may not completely free you from liability, as you may still be responsible if the assignee falls through.
As a tenant, the best choice will ultimately depend on your current situation and needs. You will want to weigh the benefits and consequences of each form of transfer, as well as the reliability of the third party. Be sure to think through this choice, as the outcome of your tenancy may affect the rental history of your business and impact your future rental potential and credit.
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