Differentiating between an Assignment Clause and Sub-Leasing Clause in a Commercial Lease

By Ridhima Pathak

Assignment of a Commercial Lease

A commercial lease often has an assignment clause to offer commercial tenants the opportunity to assign their rights and obligations in a lease to a new tenant.

An assignment clause is included in a lease for the purposes of offering a commercial tenant flexibility during their lease. This could be in circumstances where the tenant is going through a corporate restructure, downsizing, relocating for example. It also provides a tenant the ability to mitigate their ongoing rental obligations if the premises is no longer required for business operations.

An assignment clause is included in a lease for the purposes of offering a commercial landlord to maintain control over who occupies the premises. As a landlord, you want to ensure that a new tenant as the financial capability to assume the unit, to prevent any competing businesses to occupy the unit specifically if it’s a multi-tenanted property, have the ability to negotiate lease terms, and to ensure that the original tenant remains responsible if the new tenant were to default.

When negotiating an assignment clause, both parties must consider a few factors including the requirement of landlord’s consent and what that would entail, the timeframes in responding to an assignment request, and the liability held by the original tenant. In short, a commercial tenant would view an assignment clause as an exit strategy whereas a commercial landlord would view it as maintaining control.

Sub-Lease of a Commercial Lease

A sub-lease differs from an assignment where the tenant rents the premises to a third-party subtenant rather than transferring its leasehold interest. The subtenant is responsible for the rent payments to the tenant, who effectively becomes a sublandlord. However, the original tenant remains liable for all obligations under the original lease.

A sub-lease clause is exercised when a tenant has excess space, seeking flexibility, and an effort to offset their rent payments specifically pertaining to any unused space in the unit.

Similar to an assignment clause, for a landlord to maintain control over a sub-lease circumstance, they must approve the sub-tenant, ensure that the sub-tenant has financial capability, prevent any competing businesses, allows them to monitor the occupancy of the space, ensure continued compliance with the terms of the lease, and ensure that the original tenant remains responsible under the lease.

Ultimately, an assignment or a sub-lease clause offers both flexibility to a tenant and protection for a landlord. A formal assignment and assumption agreement, or sub-leasing agreement is entered into by all parties. It is important that these clauses be drafted in a way that suits the needs of your business. Negotiating the provisions of these clauses at the outset of a lease can avoid any disputes between the parties at a later date and address any changing circumstances during the term of a lease.

Kindly note that the landlord’s consent plays a critical role in assignments or sub-leasing. This will be discussed in a later article.

Please contact Ridhima Pathak (ridhima@sorbaralaw.com) for assistance in drafting or negotiating your commercial lease.