What is the difference between subletting and assignment?
Sublet and assignment provisions are common in a lease agreement because they establish the terms and conditions under which a tenant can transfer their lease obligations to another party.
For Tenants, it’s a particularly important provision because it establishes how a tenant mitigates risk and lease costs if the space is no longer needed. It is also important because it details how transfers may occur in the future because of mergers, acquisitions, or a sale of the company itself. Poorly crafted sublet and assignment provisions could materially stop or slow transactions for the business.
For Landlords, it’s an extremely sensitive issue because the creditworthiness of the underlying tenant is at stake when any sublet or assignments occur. This could alter the value of the property and lease when a less creditworthy occupant moves in.
Why is Subletting Provision Important?
Subletting is when a tenant rents out all or part of the property they are currently leasing to another party, known as the subtenant or sublessee. In this arrangement, the original tenant, also called the sublessor, remains responsible for fulfilling the terms of the original lease agreement with the landlord, including paying rent and maintaining the property.
In this instance, a separate third-party transaction (the sublet) is performed between the sublessor and the sublessee, with the remaining term being what is on the original lease. The Landlord then approves or disapproves such an agreement by providing the conditions of why or why they are not consenting. Because the original tenant is still on the lease, the Landlord is not often worried about the original tenant but can be concerned about how the new occupant will use and treat the space.
Typical negotiated terms for a sublet provision are the notice periods, the conditions for consent of the landlord, and how much of the profits (if applicable) will be shared.
Why is an Assignment Provision Important?
An assignment refers to transferring the tenant’s rights and obligations under the original lease agreement to another party, known as the “assignee”. Unlike subletting, where the original tenant retains some responsibility, an assignment fully transfers the lease to the new tenant. However, like a sublease, a traditional assignment still requires notice to the Landlord for approval.
An assignment is typically a bigger deal to a landlord than a traditional sublease because, in this case, the new entity will take over the previous entity’s obligations under the original lease. This is important to a landlord because the creditworthiness of the underlying tenant will be changed from the original tenant to the new tenant.
Often, the provisions negotiated in an assignment are the creditworthiness standards of the new entity and notices required under such a transfer.
Tenants can be sensitive to such provisions because their creditworthiness on paper may change because of increased debt or the controlling entity may change in the event of a future sale or purchase. When this happens, they don’t want to require notice to a landlord on whether they can make a company business decision. Permitted transfers are often included to address such issues.
What is a Permitted Transfer?
A permitted transfer is a specific transfer or assignment the landlord allows the tenant to undertake without breaching the lease terms and typically without notice to the landlord. This type of paragraph is intended for when the underlying tenant changes to the entity that is part of the underlying business via a merger or consolidation.
