The ins & outs of subleasing

Subleasing or assigning space in commercial property is an area of great interest to commercial tenants right now.

More and more commercial tenants are finding they would like to sublease or assign space that has become surplus to their requirements.

Some firms are being forced to reduce staff, others need less space because more people work from home or in the field and others are simply looking for economies and reassessing how much space they need.

New Zealand law history books show a huge number of cases regarding subleases or assignments of lease. Simply put, there is a difference between subleasing and assigning.

In the case of a sub-lease, the original tenant continues to be responsible for maintaining all aspects of the lease, but it does get a contribution to the rental.

In the case of an assignment of the tenant’s lease, the assignee takes on all the lease responsibilities, although the landlord has a final call on the tenant if the assignee fails.

Like all negotiations, the devil is in the detail – in this case the details of what the landlord and tenant agree should happen if the tenant should ever want to sublet or assign the property.

As you might expect, landlords and tenants can have very different points of view about how assignments and subleases should be handled. Negotiations in this area can be very interesting.

The tenant wants as much flexibility as possible to sublease or assign space to match their needs.

On the other hand the landlord is going to be concerned at losing too much control. They may have concerns about who space is subleased or assigned to and they may also be concerned that the spaces to be subleased may compete with and potentially undercut other space they wish to lease in the building.

You can imagine the scenario where a landlord is marketing several vacant floors of a building and a tenant on another floor is offering spaces for sublease at a lower cost.

So landlords can go to quite some lengths to put some tough measures in a lease regarding subleasing, that can give them the ability to say flatly “yes” or “no” to a sublease or be unreasonable in dealing with a proposal to sublease or assign.

I believe the way to negotiate a win-win lease covering subleasing and assignment is for both parties to consider the long term. Flexibility can benefit all, because at the end of the day, if a tenant is stymied in their attempts to lease or assign, they are likely to vacate the space at their first opportunity, so it will sit there empty.

Research published in May 2009 shows that high vacancy levels and lower rentals will be the norm throughout the globe for at least the next two years.

If vacant space is sublet or assigned and occupied by a going concern it is better for all. At the end of the lease term, the landlord potentially has a sitting tenant to negotiate a new lease with.

With fewer tenants signing new leases during the Great Recession, both landlords and tenants will be giving careful consideration to the way the subleasing & assignment clause in their lease is constructed.

As always, obtaining qualified advice before signing any documentation is essential.

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