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As a tenant in commercial property, there may be a time before the lease term ends when you no longer need the premises. Where this occurs, you may assign or sublet your commercial lease if it allows. These actions will fall under the alienation provisions in your lease agreement. However, despite this, assignment and subletting are quite different lease terms and actions on the original lease. Therefore, you must decide which one suits your situation best. This article will explore how commercial tenants can assign or sublet a commercial lease.
This cheat sheet outlines what you should be aware of in your lease agreement.
What is an Assignment?
Assignment is when a commercial tenant transfers the lease to a third party. They act as an assignor, and the new tenant is the assignee. Another term for this is the outgoing tenant and the incoming tenant.
If your lease end-term date is still some time away and you no longer wish to occupy the property, an assignment may be an option for you. Assigning your commercial lease may suit you when you no longer need the commercial premises, perhaps because you cannot afford it. Your business may be in trouble, and rent is unaffordable.
Lease Obligations
When you assign your lease, the lease continues to exist. However, you are no longer a party to it and, therefore, usually no longer responsible for the lease obligations. You also no longer have an interest in the property. Instead, the incoming tenant or assignee takes on lease obligations.
However, your landlord may require you to enter an Authorised Guarantee Agreement (AGA) before you can assign the lease. Accordingly, you are liable for the lease obligations if the assignee does not comply with them. Consider this when selecting an assignee and reviewing their financials. If they default on paying rent, you may be responsible for this payment.
Your Assignee
When you look for an assignee for your lease, both the assignee and your commercial landlord will want to satisfy themselves that the assignment is suitable. This means your landlord will want to ensure that the incoming tenant is financially able to take on the lease. Equally, the incoming tenant will want to check that the commercial lease terms and property type work for their business.
What is Subletting?
When you sublet your commercial lease, you grant a further lease to a third party. It will often be shorter than your current lease term and will cover the whole or part of the premises. Therefore, you maintain your original commercial lease and interest and still have personal rights on the commercial premises.
When subletting your commercial lease, you can return to the premises later in the lease term or retain part of it as your business premises. If you are happy with your commercial space but find the whole amount unmanageable, subleasing may be the right option. Also, if you do not need your commercial premises for a short period, it may suit you.
Lease Obligations
Unlike assignment, you retain the lease obligations if you choose to sublet your commercial lease. For example, you are the only one liable to pay rent and carry out repairs. As the tenant with the head lease, the subtenant will need to pass you their share of the rent, which you will use to pay the overall rent for your commercial lease, the head lease.
A sublease offers you extra income, which may be helpful if your business is not doing well or you require money for business development. However, you must also manage the subtenant and ensure they stick to their obligations in the sublease.
Like assignment, whilst you need to get your landlord’s consent to sublease, they do not need to check the tenant’s suitability. This process is up to you. Therefore, subleasing may be suitable for you as it avoids the barrier of your landlord in progressing the lease action. However, your landlord still needs to check the terms and conditions in the underlease.
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Key Takeaways
You may decide to assign or sublet the lease if you no longer require your commercial premises. An assignment is where you, as the assignor, transfer your existing lease to a third party, the assignee. With subleasing, you create a new lease in addition to the existing lease for a subtenant to occupy part of or all your business premises. Whether assignment or subletting is best for you will depend on your circumstances. For example, if you no longer require commercial premises, an assignment may be a preferable option. However, you may be happy with your business premises but have extra space and need additional income. In this case, subleasing may suit you.
If you need help understanding whether you should assign or sublet your commercial lease in the UK, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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