Most commercial leases contain a prohibition on the tenant transferring its interest in the premises to a third party. A typical provision may say: “Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, “assign or assignment”) or sublet all or any part of Lessee’s interest in this Lease or in the Premises without Lessor’s prior written consent.” What does this really mean? Landlords and tenants alike should read these provisions carefully and have some basic understanding of the underlying law with respect to assignments and subleases. Often, the parties to a lease do not anticipate that these provisions would ever be relevant – the tenant believes his or her business will be successful and will be able to pay the rent for the term of the lease, but sometimes circumstances change and the tenant may have to look for a third party to take over its rental obligations.
First, it is important to distinguish between an “assignment” and a “sublease”. An assignment requires that the tenant transfer all of its interest, meaning that the original tenant or “assignor” will no longer has any obligation to the landlord, and the landlord must look only to the assignee as the new tenant for any breach of lease. A sublease by contrast, involves a transfer of less than the entire interest in the premises. Thus, the original tenant or “sublessor” remains fully liable to the landlord in the event that the subtenant fails to perform.
Whether or not the lease says so, under California law (for leases signed after September 1983) a landlord cannot unreasonably withhold consent to a sublease or assignment. Much litigation has been generated over the years over whether a landlord’s decision not to allow a sublease or assignment was “reasonable.”
In order to avoid these problems when the issue should arise, both landlords and tenants should seek the advice of legal counsel. You can contact me with any questions at email@example.com or (310) 544-7161 for a free telephone consultation.