Understanding Assignment and Subletting in Commercial Real Estate

In commercial real estate, assignment and subletting clauses play a crucial role in balancing the interests of landlords and tenants. Landlords generally demand control of any assignment and subleasing of a lease, enabling them to maintain control of the tenant mix in a retail project and determine the viability of tenants in other settings. On the other hand, tenants seek the flexibility to transfer underperforming leases and to sell their entire business or the location in question or a group of locations without landlord interference.

Negotiating Assignment and Subletting Provisions

Assignment and subletting provisions are often carefully negotiated to strike a balance. Most landlord leases require landlord consent for a tenant to assign a lease or sublet all or a portion of its premises. For this, there are typically stipulations to ensure that a landlord cannot unreasonably withhold consent. Common criteria landlords consider are the financial strength of the proposed assignee or subtenant at both the equity and liquidity levels, alignment with the property’s existing use and tenant mix, prior performance and operating history, and existing co-tenancy and exclusive use provisions, among others. These factors are considered under a provision where the landlord agrees not to unreasonably withhold consent to an assignment or sublease if certain minimum thresholds are met in the above criteria.  Negotiating clear thresholds for these criteria within the lease ensures transparency and reduces potential disputes.

In addition, stronger tenants often demand and obtain pre-approved transfers where no landlord consent is required. These usually include transfers to tenant-affiliated or related entities under common control as tenants, as well as mergers, consolidations and location or asset sales.

Another provision often negotiated is how much the tenant will pay the landlord for the landlord undertaking the review and approval process for the tenant to be able to assign or sublet. To offset this, leases often require a fee payable by the tenant. These fees can range from $1,500 to $5,000, depending on the complexities of the process. The fee is typically non-refundable and is due regardless of whether the landlord approves or disapproves of the transfer.

Key Takeaways

Assignment and subletting provisions are vital for both landlords and tenants in commercial leases and commercial real estate. For landlords, these clauses help protect their properties’ financial and operational integrity. For tenants, they provide the flexibility to adapt to changing business needs. Negotiating these terms with clear guidelines and mutual understanding is essential for a successful leasing relationship.

Ready to navigate assignment and subletting clauses in your commercial lease? Contact us for advice and tailored strategies to protect your interests.