Why do attorneys spend so much time on the assignment and subletting provisions in a lease agreement? Are they cranking up their billable hours over an academic exercise that is interesting only to lawyers? I would like to think that the answer to the latter question is a resounding no, so the focus of this blog post is to tackle the first question.
First, what is an assignment or a subletting? In its most basic terms, both are legal transfers of a tenant’s interest in a lease agreement (a.k.a. its leasehold interest). An assignment transfers 100% of the leasehold interest, while a sublease transfers less than 100% of the leasehold interest. Practice pointer—if you want to make sure that you’re creating a sublease, make the sublease term expire at least one full day before the expiration date of the prime lease. There are cases construing a so-named sublease agreement to be an assignment agreement.
So why focus on the assignment/sublease provisions in a lease? Let’s start with the default rule that unless changed by the lease or by statute (such as in Texas), a tenant of a lease for a stated term may transfer all or any portion of its leasehold interest without having to provide notice to, or obtain the consent of, the landlord. Thus in most cases if the lease doesn’t cover transfers of the tenant’s leasehold interest, then there are no restraints on the tenant. It can assign, sublease, license, mortgage, you name it without the landlord having any say in the matter. Obviously, this is divine for tenants, but can be a surprise to landlords who think that when they sign a lease with X, that X will be the tenant for the duration of the lease term.
Landlords, or more likely their attorneys, have thus added provisions to their leases that sometimes go on for multiple, legal-sized pages (don’t get me started on legal-sized paper, which in my humble opinion is a relic of the past, and annoying to boot; do you really think you’re fooling me into thinking that you have such a reasonable, short agreement by creating a document in 8-point font and legal-sized paper?), prohibiting transfers on the tenant’s leasehold interest without the prior consent of the landlord.
The underlying purpose of the landlord’s assignment/subletting provision is to undo the common law rule of unrestrained transfer by the tenant. Failure to do so can have unintended consequences for the landlord—for example, a person or entity occupying the space who is not an acceptable tenant from the landlord’s perspective for a myriad of possible reasons. The tenant’s focus is on scaling back as much of the landlord’s restrictions as feasible in light of each side’s interests and leverage. Even if the tenant thinks that it will be occupying the premises for as long as it can imagine, and in the same entity form, I highly recommend maximizing the tenant’s exit strategy.