The Importance Of Negotiating The Right To Sublease Or Assign Your Commercial Lease (+VIDEO)

May 15, 2019 | 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/business climate, companies 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?

Keep it flexible

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.

Image of a persons hand signing a sublease | Negotiating sublease article

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

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 important differences to consider:

Lease assignment

A lease assignment is when an entire property/space, including the existing tenant’s rights and interest in the commercial lease, is 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. That means the original tenant is not liable anymore 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. That means that the original tenant shares the rights and responsibilities to the premises.

A sublease may be preferable for tenants who wish to lease out part of their property to another company for the remainder of the lease term. It may also suit if a tenant needs 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.

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

Image of a person sitting at their office desk | Negotiating sublease article

The importance of a lease assignment and sublease clause

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.

Other options for breaking a commercial lease

The odds usually aren’t stacked in the tenant’s favour when it comes to breaking a commercial lease. However, if you used a tenant representation specialist before signing your contract, you should have received the right advice to protect yourself.

Break clause

Well negotiated leases may have a ‘break clause’, however, most landlords are reluctant to include one of these. A break clause basically lays out the circumstances and the manner in which a tenant can break a commercial lease early.

As with any contract, it’s up to the two parties to negotiate terms. One option may be to allow early termination of a lease if a new tenant with similar financial security takes over. This is similar to an assignment. However, the new tenant would take over the full liability of the remaining lease.

Pay out the commercial lease term

Not a desirable option for most tenants, however, there may be situations where it is the only choice. For example, if you were closing your business before the expiry of your lease term and there was no way to arrange an assignment or sublease, paying out the remainder of your term may be the only course of action.

Most people would consider this a worst-case scenario. This, again, highlights the importance of seeking the help of a tenant representation specialist prior to signing any commercial lease.

Our advice

Commercial 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.

An image of two people shaking hands | Negotiating sublease article

Work with a commercial tenant advocate

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!

Not convinced? Here are seven great reasons to hire a tenant representation specialist.

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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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