Yesterday I wrote a blog about subleasing in commercial real estate which is usually the most common option when the space or unit is no longer needed by the tenant for various reasons. Today I want to touch on the other option which is commonly referred to as a lease assignment.
If you read my blog on subleasing you would notice that I mention that the original tenant still remains on the hook to fulfill obligations of the original lease in that the sub-tenant pays the tenant and the tenant still pays the landlord in addition to fulfilling other obligations in the document. The difference with a lease assignment is that it usually releases the original tenant from its obligations to the lease. While this may sound like the more attractive option from the tenant’s perspective, it’s not always an option on the table and it’s often not the preference of the landlord. In the lease assignment one tenant assigns all responsibilities of the lease to the new tenant, letting the original tenant off the hook. The new tenant would have a direct relationship with landlord going forward.
So what are some reasons that a lease assignment would be preferred over a sublease? As mentioned above the first choice and sometimes the only option a landlord wants to give is the option to sublease. In the eyes of the landlord they have an existing relationship with the current tenant so they may not feel comfortable working with a lease assignment. Reasons for a landlord to consider a lease assignment instead of a sublease is because there may be an opportunity to achieve higher rents with the newer tenant, or the newer tenant may appear to have a more solid financial backing (such as a well known national franchise) vs. a mom and pop business that is going out of business. It’s obvious the landlord would want to form a direct relationship with a tenant they perceive to be a better fit for the building and their investment goals.
If you’re a landlord or tenant who has encountered this situation and don’t know what’s best, weigh the pros and cons of either and it should be clear what is best for the scenario.