If you rent space in an office building, strip retail center or some other commercial building, at some point in time, you may need to find someone else to share your space because you have too much space, or you may need help in making rent payments. In some circumstances, you may realize that you no longer have need for the space because you have outgrown it, or it is too much and you need to get out. Under most commercial leases, you cannot simply allow someone else to start using some or part of your premises, nor can you walk away from the lease obligations. You will need to look at your lease to see if you are permitted to either sublease or assign some or all of the premises, and if so, under what circumstances.
Leases will usually allow you to sublease or assign the premises with Landlord’s prior consent, either at Landlord’s sole discretion or with such consent not to be unreasonably withheld. Some leases will list certain criteria that the new user may need to meet in order for it to be deemed reasonable for the Landlord to accept such party as a new tenant or subtenant. In addition, it may be considered an assignment of your lease, if you sell some or all of the ownership interests in your business, so be mindful of that if you plan to bring on other owners. Usually, the sale of some or all of the business is a concern to the Landlord if and when it affects who controls your company after the sale. Remember, this is the Landlord’s property and they want to control who is using their space. Also, Landlords are of the opinion that they are in the business of renting real estate, and you, as tenant, are in the business of providing whatever services or products you sell.
An assignment of your lease could also occur if you get a loan and your lender requires that you post your interest in the lease as collateral. Therefore, be careful when entering into a loan for your business and how it may affect your lease.
If a Landlord does agree to permit a sublease or assignment of the lease, they may require that you pay to them all or part of the money that you collect from the third party over and above the amount of rent you are paying. You need to be careful in trying to limit the wording of your lease as to what is included in the definition of the money you would owe to the Landlord. Some leases will require this to include any money you receive from the third party, whether it be for actual rent payments, office sharing costs and even the money you receive if that third party is purchasing your business and/or equipment.
Pay attention to the Landlord’s ability to retake the premises if you choose to exercise a sublease or assignment right. You may be perfectly content with the Landlord taking back the space, however, if you were only planning to allow a temporary use of the space by the other party, you may not want the Landlord to take the space from you for the remainder of the lease term.
Most Landlord’s may also want you to pay a fee to them for consideration of an assignment or sublease request to cover their administrative costs and attorney fees that they may incur. You will want to try to place a cap or limitation on how much this fee will be.
These are just some examples of issues that can arise when considering subleasing your premises or assigning your lease. Careful review and planning by you and your professionals is important to make certain you are covering all of your bases.
Contact Michael Faerber or any of our attorneys in our real estate legal team at McMillan Metro, P.C. if you have any question about the foregoing or if we can be of help to you with your real estate law or other legal matters for you or your business.