If you are planning to vacate your commercial premises it could be costly to negotiate a surrender of the lease with the Landlord, especially if there are several years remaining on the lease. To avoid this expense, an option could be to find a third party to occupy the premises covering the costs you would otherwise be paying. This can be done either by sub-letting or assigning your lease.
It is first important to read your lease and understand what the Tenant’s ‘alienation’ rights are as this could restrict your options. It is then essential to understand the key differences between the two, in order to decide on the best option, depending on specific circumstances.
In simple terms an assignment of a lease is the transfer of a lease to a third-party who will become the new tenant or ‘Assignee’. They will pay rent directly to the Landlord and take over all the responsibilities as stated in the original lease.
In a sub-lease the original Tenant continues to pay rent to the Landlord as usual, but the ‘sub-lessee’ would pay the original occupier a rent in return for occupying the premises.
So, what are the costs and benefits of each?
When sub-letting a premises there is an opportunity to negotiate with the ‘sub-lessee’ and potentially achieve a higher rent or ‘profit’ rent. Terms within the sub-lease, such as a break-option could be included, which would allow the ‘sub-lessor’ to re-occupy the space. Depending on wording within the original lease there may be the option of sub-letting part of the demise. This appeals to many tenants if they are occupying more space than is required and want to reduce costs yet are planning to reoccupy the space when they expand in the future.
When sub-letting, the relationship between Landlord and the original Tenant does not change. The Tenant will remain liable for any costs, such as dilapidations at the end of the lease, no matter what the sub-tenant does. It is therefore important to have a carefully drafted sub-lease to avoid any problems or unexpected costs caused by the sub-tenant in the future.
In an assignment, the lease is transferred to the ‘Assignee’, and they will pay the Landlord directly. The ‘Assignor’ will longer be responsible for any costs or responsibilities within the lease and can walk away from the premises. There may also be an opportunity to seek a premium if the passing rent is significantly below the Market Rent.
The Landlord may request the ‘Assignor’ acts as a guarantor before they will grant consent for the assignment of the lease. This will mean that if the ‘Assignee’ stops paying the rent or goes into administration the Landlord can come back to the original Tenant to recover cost. To reduce this risk, one should look for a company with a strong financial covenant when assigning a lease.
If you are considering assigning or sub-letting your space, there will be several factors you will need to consider that could include:
Is there an opportunity to get a ’profit’ rent or a premium?
What is permitted within the lease?
What are the costs of managing a sub-tenant?
What is the risk of the sub-tenant / assignee being unable to pay the rent?
And finally, to avoid any unforeseen costs or problems it is always worth seeking professional advice in advance!