- Under a sublease, the original tenant is still bound to the landlord for all its obligations under the original lease.
- Under an assumption, the new tenant steps into the shoes of the original tenant and assumes all the rights and obligations under the original lease.
- It is very important for commercial real estate property owners to make sure they are protected by the terms of a lease.
First things first – by the time you read this, it will likely be Thanksgiving or just before. So I hope you are all looking forward to a great time with your friends and family. I know I am.
But first – a little business. This week I want to write about an issue that not only have we dealt with recently at Bukowski Law Firm, but its also relevant to a commercial real estate development here in Austin.
I am, of course, talking about subleases and assumptions of leases. If you are a commercial real estate developer, you have to make sure that your lease protects your rights as the landlord. And that includes having clear guidelines for subleases and assumptions. So that’s what we will talk about this week.
Subleases do not Release Original Tenant
You undoubtedly read recently that – after leasing 589,000 square feet of office space in a new tower in downtown Austin just eleven months ago – Meta has decided it no longer needs all of that space. According to the article in the ABJ, therefore, Meta is looking into subleasing that space.
The key to a sublease is that it does not relieve the original tenant from its obligations under the lease. If party X has a lease with a landlord, party X may want to get rid of some of the space it has. It may be able to sublease some of that space to party Z.
But under a sublease agreement, party X is not relieved of its obligations to the landlord. It still has to pay rent to the landlord and it is still responsible for the other obligations under the original lease. That lease is still in place. The only difference is now it has a subleaser – party Z – that is liable to it (party X).
But if party Z does not pay party X for rent under the sublease, party X is still liable to the landlord for the rent in the original lease. And if party X does not pay the landlord, the landlord can evict and sue, regardless of what party Z did or did not do.
Assumptions do Release Original Tenant
In contrast to a sublease, an assumption of a lease completely relieves the original tenant of its obligations under the original lease. The party that is assuming the lease steps into the shoes of the original tenant. And it assumes all of the obligations under the original lease.
If party Z, therefore, assumed the lease from party X, party Z would pay rent directly to the landlord. Party X would no longer be involved in the transaction and have no more rights or obligations under the original lease. If the landlord does not receive its monthly rent, its recourse would be against party Z – not party X.
Commercial Landlords Need to be Protected
As a commercial landlord, it is essential to make sure the rights of your tenant to sublease and/or do an assumption of the lease are clear. That should be explicitly spelled out in the original lease.
For our clients, we recommend not allowing tenants to sublease or have an assumption without the express written consent of the landlord. And the landlord can withhold that consent for whatever reason it chooses, or no reason at all. This is important because you do not know what kind of subtenant the original tenant will bring to you. As a result, you need the possibility of being able to reject the new tenant if it does not meet your standards.
By doing this, you can make sure you are protected as a property owner and when someone like Meta wants to back out of a lease agreement, it is still responsible for the rent.
