Understanding Lease Assignments vs. Subleases
If you are in the market for a commercial office or retail space, and you are about to sign a lease agreement, you will want to familiarize yourself with both the financial and the legal elements of the terms in the lease agreement. The process of leasing a business space can be very complex as it often involves a commitment in terms of time, expensive deposits, and restrictions on how you can later alter the terms of your lease. Worse yet, you need to avoid the common mistake of allowing an existing tenant to transfer the lease to you, without getting landlord approval for the transfer.
Most modern commercial lease agreements restrict the existing tenant’s ability to transfer that tenant’s rights under the lease to another person. Transferring rights under an existing lease is known in Virginia property law as either an assignment or a sublease. Both concepts are different in the way they will remove your relationship and obligations to your landlord.
An assignment of an existing lease agreement is often prohibited in a lease agreement. The reason for this is that the law in Virginia will not allow a landlord to enforce lease provisions of an initial lease with the third party tenant. Remember, if you have a lease and you decide to assign that lease to a third-party, the landlord can still come after you for unpaid rent. It is often misunderstood that if a third party tenant signs an assumption agreement that the selling tenant is released from further liability for rent. An assumption agreement states that as a third party tenant you recognize the obligations under the Master lease and agree to be bound to those original terms. The assumption agreement does not release you as the original holder of the lease agreement from your obligations to pay rent under the Master lease.
If you currently have a lease agreement and you want to move or relocate your business check your lease and see if there is a provision prohibiting you from assignment. If not, then you may want to consider an assignment. Just remember, in addition to an assumption agreement you will need to ask your landlord for a release from all obligations, including the payment of rent, so that once the lease is assigned you are no longer at risk of unmet obligations.
A sublease does not void your relationship between you and your landlord. Under a sublease, your master lease agreement is still valid and the sublease between you and a third-party tenant will be treated as a separate agreement. Under a sublease the third-party tenant is liable to you based on the terms you both agree to and your landlord is treated as a third-party beneficiary. This means under a sublease agreement is your responsibility to make sure the third-party is paying rent and meeting the obligations set forth in your sublease agreement. Your landlord stands outside of the sublease agreement and looks to you for payments and obligations if they are not taken care of by the third-party tenant.
These topics can be very complex but they are important as you try to find a place for your business. Regardless of where you are in the process you may want to hire an attorney to review a current proposed lease agreement or help you terminate an existing lease. At the Strong law firm we offer an array of business services to help often at an affordable, flat fee.