Take a look at my last few blog posts for a refresher on the basics of assignments (a transfer of 100% of the tenant’s leasehold) and subleases (a transfer of less than 100% of the tenant’s leasehold). Now imagine you have excess space; which vehicle do you choose—assignment or sublease?
Assignment: The assignee steps into the original tenant’s shoes and pays rent directly to the landlord. Key here is that the assignor (original tenant) is not released from liability under the lease. Of course the landlord can affirmatively agree to release the assignor, but it has no obligation to do so unless the release was prospectively required by the lease agreement (not a common “give” of landlords). I have had many a client who wrongly assumed that once they had assigned a lease they had washed their hands of the lease. Au contraire. Once a tenant assigns its leasehold, its privity of estate with the landlord ends, while privity of contract continues. Translated, this means that while the original tenant remains liable under the lease, it no longer has the right to occupy the space and thus may not exercise landlord/tenant remedies such as eviction of its subtenant/assignee, nor may it perform its surrender obligations if its subtenant/assignee fails to do so. The non-release of the original tenant (assignor) means that the original tenant’s liability under the lease continues into all extensions of the lease term even if the assignee extended the lease term without the original tenant’s involvement. (Practice tip for tenants—in your assignment document, reserve all rights in the lease to extend the term, etc.) Bottom line: the original tenant assumes much of the risk of the assignee’s behavior.
Sublease: The subtenant pays rent to the original tenant, who retains its privity of contract and estate with the landlord. (Note that many landlord consent documents modify this to require the subtenant to pay rent directly to the landlord, and bypass the tenant entirely, upon the occurrence of certain events such as a default under the lease by the tenant.) The original tenant becomes a sublandlord, and as such may exercise landlord remedies, such as eviction should the subtenant fail to vacate timely. But on the flip side a subtenant’s holdover for even a short period can result (in some situations and if not fixed by appropriate lease language) in the automatic extension of the lease term for another year, with the original tenant (sublandlord) remaining fully liable.
How about if the assignee or subtenant files for bankruptcy? In the case of assignment (without an affirmative release by the landlord), if the lease is rejected, the assignor remains liable to the landlord but will not be able to even try to mitigate by regaining possession and operating from the leased premises because it gave up its possessory rights. In the case of a sublease, the sublandlord retains the ability to seek to compel the payment of rent during the bankruptcy or try to get the sublease rejected, and also will be in charge of deciding whether to accept a modified deal or waiver of cure amounts in exchange for lease assumption; if the lease is rejected, the sublandlord would get the claim and would be in charge of further mitigation efforts.
So which should you choose, an assignment or sublease? Most people jump to assignment as the chosen method for shedding excess space. After all, it certainly sounds like you’re getting rid of space—giving it to a new tenant and now making it their problem. But if you haven’t fallen asleep yet, then you know that you should strongly consider a sublease unless the landlord will also agree to release the assignor.