There will be times when your business needs to vacate a commercial space before the existing lease expires. There are a number of reasons why this might be necessary including going out of business, selling the business, or you need to expand and lease more space however the existing building cannot accommodate your needs. Whatever the case it’s difficult to predict the future so it’s important that you negotiate as much flexibility in your commercial lease as possible in the beginning. In the event business conditions change whether good or bad one way to mitigate your commercial lease obligation is by negotiating a sublease and assignment clause. You may not think this is important however you don’t have any control over the future business climate.
Subleasing and Assignment are not the same thing.
Assignment Clause in a Commercial Lease
With an assignment the original tenant may get sell a portion or all of the shares of their business and want to grant the obligations and rights of the commercial lease to the new partner or business owner. The assignment essentially removes the original lease guarantor off the lease and they are have no further obligations. The new entity takes over all obligations of the lease. This situation is more risky for landlords since they don’t know the background, financial strength, or reputation of the new entity. In most situations IF a landlord agrees to the lease being assigned they will ensure that the new entity has financials that are at least as strong or better than the original tenant. They also will want to ensure that the new entity fits into the existing tenant mix and does not conflict with any exclusivity clauses.
What you will find is that many landlords will not release an existing tenant from the lease obligations even if the landlord agrees to the assignment. In most cases the original tenant will still be on the hook with the landlord and have to secure a guaranty themselves from the new entity.
Sublease Clause in a Commercial Lease
When subleasing commercial space the original tenant finds another company to sublease a portion or all of their space, however the original tenant remains contractually bound to the lease. Meaning if the sublessee does not pay rent or defaults the landlord can go after the original tenant to collect rent or damages. A sublease situation is less risky for a landlord. There are many advantages & disadvantages of subleasing commercial space.
Example Assignment and Sublease Clause Commercial Real Estate Lease
(a) Tenant shall not sublet or assign all or any part of this Premises or allow the Premises to be used or occupied by others (any such event being referred to herein as a (“Transfer”), or mortgage or otherwise encumber its leasehold estate under this Lease or its property within the Premises, without written consent of Landlord, which will not be unreasonably withheld subject to Section 9.1 (c) below.
(b) Tenant shall give Landlord at least sixty (60) days’ advance written notice of any proposed Transfer, stating the anticipated terms thereof and all relevant information on the proposed transferee requested by Landlord. Landlord shall then have a period of thirty (30) days following receipt of such notice within which to notify Tenant in writing that Landlord elects to either (i) to terminate this Lease as to the space so affected, in which event Tenant shall be relieved of all obligations hereunder as to such space arising from and after such date, (ii) consent to the proposed Transfer, or (iii) refuse consent on reasonable grounds as set forth Section 9.1 (c) below.
(c) Landlord shall not unreasonably withhold its consent to a proposed Transfer provided all of the following conditions have been met: (i) Tenant is not in default under the Lease, (ii) the nature and character of the proposed transferee, its creditworthiness, business and activities or its intended use of the Premises are consistent with the standards of the Building in Landlord’s sole judgment, (iii) the proposed transferee (or any of its affiliates) is not then a tenant of any part of the Building or a party Landlord is then negotiating to lease space within the Building, (iv) the rental to be paid by the proposed transferee is not equivalent to the then market rate for similar space in Austin, Texas, (v) the proposed occupancy would not impose an extra burden upon the Building systems or Landlord’s ability to provide services to the other tenants of the Building, (vi) the granting of such consent would not constitute a default under any other agreement to which Landlord is a party or by which Landlord is bound, including, without limitation, any exclusives previously granted to other tenants of the Project and any restrictions on leasing contained in any other leases of space in the Building, (vii) the proposed transferee is not a governmental agency or an entity with diplomatic immunity, or (viii) the requested assignment or sublease does not modify the Lease or the rights, obligations, or liabilities of either Landlord or Tenant under this Lease. Tenant acknowledges that the foregoing conditions are a reasonable basis for Landlord to withhold its consent to a Transfer and that if all of the foregoing conditions are not satisfied, Landlord may withhold its consent to a proposed Transfer in Landlord’s sole and absolute discretion.
(d) If Landlord consents to a Transfer, Tenant agrees that all Rent amounts and other consideration payable to Tenant in respect of the Transfer in excess of the Rent for the Premises or the portion thereof subject to the Transfer shall be paid to Landlord as Additional Rent hereunder immediately upon Tenant’s receipt thereof after deduction for all reasonable brokerage commissions and tenant improvement allowances actually paid by Tenant in conjunction with such Transfer, or at Landlord’s option such payments can be made directly to Landlord by such sublessee or assignee. Tenant acknowledges and agrees that, notwithstanding Landlord’s consent to any Transfer, Tenant shall remain directly and primarily liable for the performance of all the obligations of Tenant hereunder (including, without limitation, the obligation to pay all Rent). In addition, Landlord may condition its consent to any assignment upon Tenant’s execution and delivery of a guaranty of the Lease in form and substance acceptable to Landlord. The consent by Landlord to any Transfer shall in any manner not be considered to be a consent to a use not permitted under Section 1.5(a). Any consent by Landlord to a particular Transfer shall not constitute Landlord’s consent to any other or subsequent Transfer. In furtherance of the foregoing, but not in limitation thereof, the acceptance by Landlord of the payment of Rent following any Transfer prohibited by this Article IX shall not be deemed to be a consent or approval by Landlord to any such Transfer, nor shall the same be deemed a waiver of any right or remedy of Landlord hereunder as a result thereof.
(e) If Tenant is a partnership or limited liability company, a withdrawal or change, whether voluntary, involuntary or by operation of law, of partners or members owning as of the date hereof a controlling or majority interest in Tenant shall be deemed a voluntary assignment of this Lease subject to the provisions of this Section 9.1. If Tenant is a corporation, any merger, dissolution, reorganization of Tenant, or the sale or transfer (whether by way of one or more sales or transfers) of the controlling or majority interest as of the date hereof in Tenant’s capital stock shall be deemed a voluntary assignment of this Lease and subject to the provisions of this Section 9.1.
Assignment & Sublease Clauses Are Important to Your Business
Again at the end of the day it’s difficult to predict what will happen with your business 3-5-10 years from now, even if you have the best intentions. There are many ways to negotiate flexibility into your commercial real estate lease and getting the ability to assign or sublease will help. It’s important that you have some sort of right which will not unreasonably be withheld to sublease or assign your space to another company or if you sell a new owner.