As we seem to be living in what some call “interesting times”, there might be some Tenants who will deem it wise to either down size, or not have need of their space at all or even better, have the need for bigger space as business booms. Finding themselves in the middle of a Lease one of the options might be to Assign or Sublet the Lease.

An assignment is when a Tenant transfers their entire interest in a premise (i.e., the entire leased premises for the entire term) to another party. A Sublease is the transfer of all or a portion of the premises for less than the entire term.

The first step a Tenant should take when considering assigning or subletting their space is to look through their Lease for a clause that deals with this option. Typically, the Lease will call for any assignment or sublet to have the Landlord’s permission, and will state whether or not the permission should be in writing, what costs are to be covered by the Tenant, the time period the Landlord has to respond, what the Landlord will be expecting in the way of covenant from the Sub-Tenant, and other terms associated with the assignment. If a Lease is silent with respect to the right of a Tenant to assign or sublease its leasehold interest, then typically the courts are likely to decide that the Landlord can not stop such an action and this is why most Landlords will have a clause dealing with this in the Lease.

Once you have an understanding of your rights under the Lease, you next need to note how the process works. The original Lease is between the Landlord and the Tenant and although the Tenant is giving up the use of the premises through an assignment or sub-lease, they still have a contractual liability to the Landlord. An assignment or sublet does not relieve them of their obligations to the Landlord, unless he gives them his consent. This is important, as should the sub-tenant that you enter into an agreement with not pay the Landlord, nor meet all the obligations of the Lease (i.e., destroys the premises or has a use not allowed, etc.), then the Landlord can come after you to pay up, even though he gave you permission to assign.

Equally, if you are sub-letting space from a Tenant and the process is set up so you are paying the Tenant and he in turn pays the Landlord, you want to make sure that the Tenant has consent of the Landlord, and that the Landlord is receiving his rents and obligations, as even though you are paying the Tenant, the Landlord can still take action on the premises if there is a default because his contract is with the original Tenant. You could be left behind the eight ball if the original Tenant to whom you are paying rent, defaults the monthly payments to the Landlord. A Sub Tenant therefore is wise to try to arrange to pay the Landlord directly.

All the above points out to us the importance of negotiating a proper assignment or sublet clause when negotiating your original Lease with the Landlord. From the Landlord’s perspective, should a Lease be silent with respect to the right of a Tenant to assign its Lease, then the courts will probably decide such an action is not prevented. Therefore when Landlords draft Leases, it is in their interest to have a clause restricting every possible kind and type of transfer, or to condition any transfers on obtaining Landlord’s prior written approval. The Tenant should try to negotiate that the consent “will not be unreasonably withheld”. Without this wording, the Landlord may arbitrarily withhold consent. Some reasonable reasons why a Landlord might decline an assignment could be the Landlord’s objection to a proposed use that is inappropriate for the property; or the prospective assignee (or subtenant) might fail to demonstrate a reasonable financial ability to meet the obligations under the Lease as they come due.

Signing a Lease which severely restricts the Tenant’s ability to transfer all or a portion of its leasehold estate can have other far reaching negative consequences for a Tenant as well. For example, if the Tenant wishes to sell its business (either by a sale of stock, or other equity interests, or an asset transfer), it may not be able to do so unless the lease is transferable as well.

While the ability to assign its lease or sublet or a portion of its premises may significantly impact a Tenant’s ability to effectively manage the growth of its business, a Landlord has equally compelling reasons to seek to control the Tenant’s ability to dispose of all or a portion of its premises. It is for this reason that it is wise to make sure you properly negotiate this clause when entering into any Lease.