Many companies need a physical space in which to conduct their business, whether that’s a corporate office, a retail space, a service location, or even a storage warehouse.
While purchasing property or facilities is one option, not every company can afford the often significant upfront expense. A commercial lease, on the other hand, allows a business to obtain use of the facilities needed to run its operation at a far lower initial cost.
A lease, though, can still be a long-term contract. It’s not unusual to see lease terms of one to three years or more. A “5 and 5” is common, offering a five-year lease with the option to renew for an additional five years.
Still, even with the best planning, business can be unpredictable. The economy could take a turn for the worse, or a natural disaster could strike. Consumer tastes may shift, or a business might be interested in expanding to a larger space or moving to a more desirable location.
If a landlord is unwilling to release a business from its lease agreement, there may still be options to explore, such as assigning or subletting.
Assigning a Lease
For most businesses, assigning a lease is preferable to subletting for one key reason: liability. When you assign a lease to a third party, you legally transfer all interest and obligations to the new lessee.
What that means is you are essentially free from the lease you initially agreed to, and the new tenant will take on all responsibilities spelled out in the original lease, such as paying rent and maintaining the property.
It’s a win-win situation for everyone involved. Tenants will enjoy the original rental price you agreed to. And if property values have increased since you signed your lease, it could be a great deal for them, as they won’t have to negotiate a new lease at potentially higher rates. They’ll only enjoy the remainder of your term, but it saves them money for a short while, at least.
Even the landlord will benefit, as they will continue to receive rent uninterrupted without the effort of seeking a new tenant. There’s even the potential to negotiate a more profitable lease with the new tenant when the initial term expires.
Subletting
When you sublet a commercial lease, you transfer a portion of your interest to the new tenant. In other words, the new tenant pays the rent and uses the property, but you remain liable for the lease agreement.
Typically, subletting isn’t ideal for you except in one regard: You could charge higher rent for the sublet than you pay for the lease, meaning you earn some money in the process. You’ll just have to read the fine print of your lease beforehand, though. Some landlords are savvy enough to include stipulations that they will receive any additional income earned from a sublease.
Legal Considerations
Before you attempt to assign or sublet a commercial lease, you need to make sure that doing so is allowed under the lease agreement. There may or may not be stipulations, such as landlord approval, before transfers can occur.
That said, you should also understand the laws in your jurisdiction, as there may be provisions that require landlords to accept reasonable sublets to tenants who can demonstrate financial security, for example.
Furthermore, you also need to pay attention to clauses concerning business fixtures. These common inclusions typically state that any upgrades, fixtures, or equipment installed in a commercial space become the property of the landlord. As such, if you intend to move your operation to a new space, you’ll need to know whether you can remove the items you installed.
Protect Your Business Interests
Choosing whether to assign or sublet a commercial lease will depend on several factors, including your situation, the lease agreement you initially signed, and the laws in your jurisdiction. A qualified attorney will help you understand your options so you can make an informed decision in your best interests.
If you’re a Dallas, TX, business owner in need of an experienced commercial real estate attorney, contact the capable team at Sul Lee Law Firm today to schedule an initial consultation.