Summary
- Assigning a lease transfers your entire lease to a new tenant, who takes over your obligations, although you may still have some residual liability.
- Subletting allows you to rent out part or all of the premises while remaining the tenant and responsible under the original lease.
- Both options usually require landlord consent and are subject to restrictions set out in the lease.
- This guide explains the difference between assigning and subletting for UK business tenants, helping you choose the most suitable option for your circumstances.
- LegalVision, a commercial law firm, specialises in advising clients on commercial leases and property arrangements.
Tips for Businesses
Check your lease terms before taking action and confirm whether landlord consent is required. Choose assignment if you want a clean exit, or subletting if you need a temporary or partial solution. Carefully vet any incoming tenant, as you may remain financially liable.
Assigning and subletting are two ways to exit or manage a lease, but they carry very different legal consequences. Assigning transfers your lease to a new tenant, while subletting allows you to keep the lease and rent out part or all of the space, often leaving you responsible if things go wrong. This article explains the difference between assigning and subletting a commercial lease and how to decide which option is right for your business.
If you are moving out of your leased space and assigning the lease to another party, you are required to notify your landlord and obtain their consent. Use this free proforma template for this purpose.
Assigning Your Lease
A lease assignment is where you find a new tenant to take over your lease and lease commitments. Your interest in the lease passes to another company or individual, and you cease to be the tenant.
You will generally need to obtain your landlord’s consent to take advantage of this option. The requirements for this will be detailed in your lease. The most common restriction is that you need their express consent. This is in the form of a written deed. Often, this will also include specific conditions that must be met. For instance, the assignee might need to have a particular financial standing. Therefore, your landlord will typically need to consent to both the assignment and the chosen assignee (the person taking over the lease). To ensure that you can quickly secure your landlord’s consent for the new tenant, find a tenant who can adhere to all the conditions of your original lease.
It is also likely that the landlord will want the current tenant to enter into an Authorised Guarantee Agreement. Most leases will include this as a condition a landlord can impose for their consent to an assignment. An authorised guarantee agreement is a document in which the tenant (which may be a company) assures the landlord that the tenant will be liable for any breach of the lease by the new tenant. Unfortunately, this means that most assignments won’t provide a full release for the tenant. However, it does mean that the tenant is not directly liable as the tenant after the assignment, only as a guarantor.
Subletting Your Lease
A sublet (an underlease) is different from a lease assignment. Here, your lease agreement with your landlord remains in place. Therefore, legally, you are still the tenant of the property. Likewise, you are still responsible for all commitments contained in your lease. With this option, you find a subtenant to lease the commercial premises (or part of the commercial space you are renting) and enter into a sublease with them. You essentially establish a landlord-tenant relationship with this new tenant, and you will both have obligations to each other.
You likely need your landlord’s permission to sublet your lease. While the landlord usually does not need to approve the subtenant since they are not involved, ensure the subtenant can fulfil all lease terms, especially financial obligations, as this impacts you. Your lease may require landlord consent for the sublease, allowing them to review and potentially refuse based on disagreement, which can delay the process.
With a sublease, you remain responsible for fulfilling your obligations in the lease with your landlord. Additionally, you must ensure that your subtenant meets all responsibilities under the sublease. This is crucial because you are still liable to your landlord. If your subtenant fails to pay the rent owed, your landlord can seek payment from you, and you, in turn, can pursue the subtenant. Moreover, since sublease arrangements often require consent, there may be a contract in place among all parties. This is known as a licence to underlet. This could grant the landlord the right to pursue the subtenant for any breaches or to enforce indemnity directly.
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Which is Most Appropriate for Your Business?
Your commercial lease agreement may have specific provisions regarding the assignment or subletting of your lease. Therefore, reading your lease and checking what it states about these two options is essential. If your lease does not grant permission for these options, you may feel you have limited choices. However, discussing your reasons for wanting to assign or sublet your lease with your landlord is always worthwhile.
Depending on the lease, you may only be permitted to underlet or assign the entirety of your premises or just a portion. If you are not utilising the entire space, it could be financially beneficial for you to share the cost. In this case, an underlease might be the best choice, as it is more time-limited and under your control.
Alternatively, you may consider moving to new premises permanently or feel you no longer require business premises. A lease assignment is likely more suitable in this scenario since it is permanent. If you are selling your business entirely, it is common for the buyer to assume your lease through a lease assignment.
Other Options
Commercial tenants potentially have other options for ending their commercial leases early. For example, your lease may have a ‘break’ clause in it. A break clause provides a mechanism for you to end your lease early, often after a particular amount of time or within a specific period.
Another option is to ask your landlord for permission to terminate your lease early. If you are facing financial difficulties, your landlord may be open to considering this option. Furthermore, it might be more advantageous for them to let you leave the tenancy early rather than potentially having to collect unpaid rent or incur the costs of eviction proceedings.
Key Takeaways
Assigning or subletting your commercial lease are two options for ending your lease early. With an assignment of your lease, you will find a new tenant to take over your lease. With a sublet, you remain the tenant of your lease but enter into a new contract with the subtenant you find. Similarly, your landlord may require the tenant to enter into an Authorised Guarantee Agreement when assigning a lease, which makes the tenant liable as a guarantor if the new tenant breaches the lease terms. Whichever option you choose, ensure you do your homework on prospective new tenants or subtenants.
If you need help assigning your commercial lease, 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.
Frequently Asked Questions
Assigning transfers your lease to a new tenant, while subletting lets you rent out part or all of the space but remain the tenant.
You usually stop being the tenant, but you may remain liable as a guarantor if the new tenant breaches the lease.
Yes. You remain responsible for rent and obligations under the original lease, even if your subtenant fails to pay.
Yes. Most leases require your landlord’s consent before you can assign or sublet, and conditions may apply.
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