Assign or Sublease? what's the best option

The stage between getting an offer accepted and the lease signing is often the most exciting. It's a pivotal moment when a business is so close to its goal, but often key negotiation sections are overlooked. Most people don’t want to discuss the exit or end, and I understand given this is supposed to be an exciting time. However, part of every good business strategy should be to at least understand and discuss the “what if” scenarios. Here are the Assignment and Sublease provisions of a commercial lease.

What is the difference between an assignment or sublease? With an assignment, the tenant is typically transferring their rights and obligations to another: this could be another person, corporation, or partnership. Once the transfer is complete, the original party is no longer part of the lease. A sublease is when the original tenant is still responsible and is giving another the right to occupy the space for some time. Often the original tenant acts as an intermediary between the landlord (often called "Master Landlord or Lessor") and the business coming to use the space. A sublease could also be for a portion of the space or just a shorter period than the original contract. In either an assignment or sublease situation, the Landlord's permission is usually required and will often require (written) consent.

The decision to choose an assignment over a sublease is ultimately a business decision, and sometimes this is a good thing. A successful restaurant operator may decide it is time to sell and move onto another venture. Having a longer-term lease with an already negotiated terms can be very favorable and increase the selling price of the business. In this situation, an assignment would be ideal: the original owner is disconnecting from the business and lease entirely. Another case could be a large accounting firm is outgrowing their current location and may need larger square footage, but still has a year left on their lease. Subleasing the space to other CPA's may be a good option so that the firm can avoid paying rent in two locations while providing for growth: a short remaining term gives the accounting firm flexibility.

Other decisions may be more complicated. For instance, what if a law firm partner wants to sell her controlling interest in the firm? Many leases include a provision that a "controlling change," sometimes "25% or more" triggers the assignment language requiring landlord’s consent. This could impact the law firm’s operations. Other lease forms may include language that describe when a landlord can withhold consent. If the existing restaurant is Mexican cuisine, but the new tenant is Italian, this could trigger a change of use and disapproval. Another example could be if the potential new law partner’s financials are not as adequate, then the landlord may be able to disapprove. While these possible situations can appear confusing there is hope!

When I start working a new business, discussing financials goals is one of my top priorities. As each business is unique, we explore all these various options and scenarios. Then when negotiating the offer and lease, we strategize about what business terms to address. And since I am representing the business, our discussions are focused on you and not what is best for the landlord. I then work with your real estate attorney so that the business terms can put into legalese during the lease negotiation process. Or at the very least, we can talk about it before the lease is signed.

References

AIR Commercial Lease Contract Forms (2018).

Bogart, D. B., & Hammond, C. M. (2011). Commercial leasing: A transactional primer. Durham, N.C: Carolina Academic Press. 2nd Edition. ISBN: 978-1-59460-893-3