Normal people don’t like to read the fine print. (Lawyers do. Yes, we are excluded from the “normal people” category.) Whether you are a landlord or a tenant, one important part of the fine print in commercial leases is the assignment (or assignment and subletting) section.
The assignment provision of a lease usually appears in the boilerplate-looking fine print near the end of a long lease. If you’ve reviewed the lease for business terms, you’ve probably glazed over after a few pages, but this is important. In some leases it’s missing, which is also significant.
What is assignment and subletting? Assignment occurs when the tenant fully transfers all its rights and responsibilities under the lease to another business. (Most leases still require that the original tenant stay on the hook if the new occupant doesn’t live up to the lease obligations, for the landlord’s protection.) The new occupant in an assignment deals directly with the landlord. In subletting, the tenant serves as the landlord for a new occupant that takes part or all of the leased space. The new occupant deals only with the original tenant, and the original tenant deals with the landlord.
An assignment/subletting provision may allow the tenant to assign or sublease without restrictions. By NC law, that is exactly the result if there is no assignment/subletting provision in a lease. Alternatively, the lease may allow it only with the landlord’s consent and require that the landlord be reasonable in giving consent, or it may let the landlord consent or deny the request in its sole discretion.
From the tenant’s standpoint, being able to assign/sublease serves as an exit ramp, although the tenant may have to backstop if the business they assign or sublet to doesn’t fulfill their obligations. If during the lease term the tenant doesn’t need all their space, or if they are falling on hard times, finding and putting another tenant in all or part of the space can be a big financial relief. The tenant has an incentive to look harder for a replacement tenant than does the landlord who has the original tenant on the hook for the duration of the lease. Tenants benefit from a lease allowing easy assignment/subletting.
From the landlord’s perspective, the notion that a lease allows a tenant to put another business in the space without landlord consent (and perhaps with the tenant being off the hook for responsibility under the lease) should be scary. Landlords need to know and control who they are leasing to. They want to evaluate a tenant’s financial ability. They want to be comfortable with the type of business operating in the space. If the tenant arranges a sublease or assignment to a new occupant who is financially unstable or who operates a business that could damage the property or could reflect poorly on the landlord, the landlord will be unhappy. Depending on the lease, the landlord may be stuck.
The “middle ground” lease wording is that the tenant may assign or sublease only with the landlord’s consent, but the landlord must be reasonable in its decision. However, lease forms vary greatly, so you will have to read your lease (hopefully before signing it, and negotiating for something different if it helps you). If you have already signed a lease, be prepared and review it before this situation arises.
Even landlords often don’t know what their lease template says about this topic. Perhaps they got a form and used it as is without realizing that the fine print matters. It is the homemade or passed-down-over-the-years forms that have the greatest risk of leaving out an assignment/subletting provision entirely (leaving the landlord vulnerable to whatever the tenant wants to do).
Like Rodney Dangerfield, lease fine print complains, “I get no respect.” Now you know why this fine print provision matters.
Kim K. Steffan is an attorney with Steffan & Associates, P.C. in Hillsborough. She can be reached at (919) 732-7300 or kim.steffan@steffanlaw.com.