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Assignment/Subletting Clause may be a Life Saver for Your Business

by Jane M. Myers, Esq.

 

Navigating a white water economy has forced almost every business owner to consider ways to cut costs. Rent is usually one of the largest overhead expenses and one that business owners would always like to reduce, especially now.  Commercial tenants are sometimes surprised to find that they can’t simply trim costs by surrendering some or all of the office space they no longer need or can no longer afford.

If a tenant wants to surrender their space, a landlord generally has no obligation to allow an early termination of the lease or to find a substitute tenant. However, there may be a solution for the tenant in the assignment and subletting provisions of the lease.

In New York, if the lease is silent on the issue, a tenant has the right to assign its lease or sublet its space without the landlord’s consent. (There are important legal distinctions between an assignment and a sublet. With an assignment, another tenant assumes all of the original tenant’s  lease obligations and has a direct relationship with the landlord.  With a sublet, the original tenant enters into a sub-lease with a sub-tenant who takes over occupancy of all or part of the space for a term that is less than the tenant’s original lease term and pays rent to the tenant who, in turn, remains directly liable to the landlord and pays the rent to the landlord.)

Unfortunately for tenants (but understandably from a landlord’s perspective), printed form leases often do away with the tenant’s automatic right to assign or sublet. The form typically states that there can be no assignment or subletting without the landlord’s prior written consent.  However, if the lease includes a rider (or is not based on a printed form), the lease may have a compromise position often arrived at between landlords and tenants – one in which the landlord agrees that it will not unreasonably withhold its consent to a proposed assignment or subletting.  In that instance, the tenant doesn’t have an absolute right to substitute a new occupant. However, the tenant does have the important assurance that if it needs to vacate some or all of its space, it can do so provided it finds a suitable substitute tenant to take over the lease. With the substitution of a new tenant, the original tenant can successfully reduce its rent costs either completely or partially (if the substitute tenant pays less than the entire rent obligation, in which case the original tenant pays the shortfall to the landlord).

Demonstrating that a proposed substitute tenant is a “reasonable” choice (and not subject to rejection by the landlord) will generally require providing the landlord with the name of the substitute tenant, showing that the substitute tenant’s business is within the scope of permitted uses of the space under the lease, and supplying financial statements to satisfy the landlord that the substitute tenant has sufficient means to pay the rent.

Understandably, landlords want to retain control over who occupies their buildings and it’s not uncommon for assignment and subletting clauses to include additional conditions.  A typical one is that the substitute tenant’s business must not compete or conflict with the business of the landlord’s other tenants.  Another common condition is that the tenant who’s looking to assign or sublet must not undercut the landlord’s ability to fill other space in the building by advertising the space for rent which is less than the rent usually charged by the landlord. Also expect that as a condition to granting consent the landlord will require an increase in the amount of its security deposit and to be reimbursed for its legal fees to approve the substitute tenant.

If rent payments are putting a strain on your business, check the assignment and subletting provisions of your lease to see whether they might offer the possibility of finding a substitute tenant to shoulder some of the burden.  Even if there’s no right to assign or sublet, it might still be worth your while to find a responsible party who’d be willing to take over some or all of the space and make a proposal to the landlord, because it’s ultimately in the landlord’s best interests to ensure that space is occupied by tenants with the means and willingness to pay rent.

 

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Please note that this article is intended only as a general discussion of issues pertaining to leasing and that it should not be taken as creating an attorney-client relationship or as legal advice with respect to any particular person, business or situation.  Circumstances and the applicable legal principles vary and you should consult with an attorney regarding any questions you may have regarding your specific situation.