Commercial Lease Assignment and Sublet Provisions a Balancing Act for Landlords and Tenants, 0720 COBJ, Vol. 49, No. 7 Pg. 34

PositionVol. 49, 7 [Page 34]

49 Colo.Law. 34

Commercial Lease Assignment and Sublet Provisions A Balancing Act for Landlords and Tenants

Vol. 49, No. 7 [Page 34]

Colorado Lawyer

July, 2020



This article identifies common problems involved in commercial lease transfers through assignments and subleases. It offers both landlords and tenants tips for solving these problems when negotiating assignment and sublease provisions in leases.

The modern commercial lease is a complex, integrated document that attempts to balance the competing interests of the land lord and tenant. As a result, commercial leases are the subject of much negotiation and are never "one size fits all." In fact, commercial leases are one of the least standardized documents in real estate practice. When any commercial lease is to be transferred in part through a sublet or in its entirety through an assignment, the issues multiply. The transfer provisions, which once seemed moot, become operative to determine whether the lease can be transferred and, if so, under what conditions. If, during lease negotiations, the parties overlooked the lease transfer provisions or gave them cursory consideration, they may be unpleasantly surprised by the result. While landlords and tenants have divergent economic interests with respect to transferring the lease, their legitimate concerns can be appropriately addressed through thoughtfully crafted transfer provisions.

This article explores common problems, issues, and solutions encountered in commercial lease transfers through assignments and subleases. It is intended to be useful both to the lawyer who in frequently encounters lease transfer problems and the seasoned practitioner who deals with lease transfer issues every day.

Distinguishing Between an Assignment and Sublease

Assignments and subleases have fundamental differences that are frequently misunderstood. A lease is both a conveyance of an interest in property and a contract.1 After executing the lease, the landlord and tenant are bound to one another by privity of contract and by privity of estate. As a result, they may each enforce the provisions of the written lease through privity of contract and the promises that arise from privity of estate.2 Privity of contract allows enforcement of the lease provisions, while privity of estate allows enforcement of only those promises that run with the land.3

Item Assignment Sublease Partial Assignment
Space All the space All or less than all the space Less than all the space
Privity of estate Assignee has privity of estate as to all the space Subtenant never has privity of estate Privity of estate but only as to the space assigned
Privity of contract Depends on whether assignee has “assumed the lease” Subtenant does not “assume” the lease Depends on whether assignee has “assumed the lease”
Rent Assignee liable for all underlying rent and additional sums payable to tenant/assignor Subtenant only liable for rent specified in the sublease Assignee liable for a share of the underlying rent under the prime lease and for additional sums payable to tenant/assignor
Term Entire balance of term of prime lease At least one day less than balance of term of prime lease Entire balance of term of prime lease, but only as to the portion of the premises so assigned
Landlord’s remedies for rent May sue assignee for all rent and may sue tenant/ assignor for all rent May not sue subtenant for rent; may only sue tenant/ sublandlord for rent May sue assignee for its pro rata share; may sue tenant/assignor for all rent
Landlord’s remedies for possession May evict assignee for breach of lease May evict subtenant if prime lease provision is breached by tenant/ sublandlord or by subtenant May evict assignee from its portion of the space for breach of lease
Tenant’s remedies for breach by transferee May sue assignee for damages, but not to recover possession or for rent May sue subtenant for rent and for recovery of possession May sue partial assignee for damages, but not to recover possession or for rent
Transferee’s liability Assignee’s liability for rent ends when it assigns the lease to another and no longer has privity of estate Subtenant’s liability to sublandlord does not end if subtenant assigns or further sublets (i.e., privity of contract) Partial assignee’s liability for rent ends when it assigns its interest to another and no longer has privity of estate
Whether the landlord, tenant/assignor, and subtenant/assignee call their arrangement an assignment or a sublease, courts typically look at the substance of the transaction. In an assignment, a tenant transfers its entire interest in the lease.4 After assigning its interest in the lease, the assignee has privity of estate with the landlord, but the assignee and the landlord are not in privity of contract unless the assignee assumes the tenant's obligations under the lease.5 Assignment of the lease ends the original tenant's rights to possession, but absent an express release under the lease terms, its liability under the lease continues.6 This means the original tenant remains secondarily liable for the assignee's obligations under the lease. Thus, the tenant/assignor may find itself liable at a future date if the assignee fails to perform its obligations under the lease. In a sublease, however, the tenant transfers less than the remaining term or less than the tenant's entire interest in the lease, leaving the original tenant with a reversionary interest in the lease.7 The relationship between the original landlord and the original tenant, including both privity of contract and privity of estate, remains intact, thereby creating the relationship of landlord and tenant between the original tenant (sublandlord) and the new tenant (subtenant). The original landlord and the subtenant have no privity of estate or privity of contract with one another, so the original tenant remains liable for the actions and omissions of the subtenant.8 However, the subtenant's rights will terminate with the original lease or when the landlord declares a forfeiture of the tenant's lease term.9 A third, less common type of transfer is a partial assignment of a lease. Such assignments are called assignments "pro tanto," not subleases, because they grant possession of a portion of the leased premises to the new tenant for the balance of the lease term.10 The landlord now has two tenants and, in effect, two leases. There is little guiding case law on this hybrid lease transfer, so it is not entirely clear whether the assignee has a contractual relationship with the landlord.11 Due to the vagaries and uncertainties that can result when a transfer of possession encompasses less than all of the space, partial assignments should be avoided. To avoid assignments pro tanto, landlords should consider prohibiting assignments of less than the original tenant's entire interest in the lease. If a landlord proceeds with a partial assignment, it should clearly document the arrangement, including the rights and remedies of the landlord, original tenant, and new tenant, and acknowledge the transaction as a partial assignment and not a sublease.12 The accompanying table illustrates the many differences between an assignment, sublease, and partial assignment.13 Restrictions on Assignments and Subleases Colorado law favors the free transferability of rights.[14] As a result, landlords frequently attempt to limit the tenant's right to transfer the lease by including lease provisions specifically restricting the tenant's right to assign or sublet. Under Colorado law, outright prohibitions against assignments are permissible and are not considered invalid restraints on alienation.15 Even if outright prohibitions on assignments or subletting are enforced, such provisions "are construed against the restriction."16 This means a court generally will construe such stipulations "against the party invoking them"17 A breach of the restriction against transfer does not terminate the lease,18 but may give rise to a claim for default.19 Generally, tenants in commercial leases negotiate exceptions to strict prohibitions against assignments or subletting because transfer provisions may be their only viable exit strategy if they find they can no longer afford the space or no longer need it. Consent to Assignments and Subleases Recognizing that absolute prohibitions are neither favored by the courts nor acceptable to most tenants, some landlords include modified prohibitions in their leases that limit the tenant's rights to transfer the lease and, if a transfer is permitted, allow the landlord to enforce the lease against both the original tenant and the new tenant to the maximum extent possible. Such provisions may reserve to the landlord, either in its sole discretion or without unreasonably withholding its consent, the right to approve a proposed lease transfer. Although the reservation of the landlord's right to approve a proposed assignment or sublease is for the landlord's benefit,[20] the landlord is bound to the standards set out in the lease for consents to an assignment or sublease.21 Accordingly, once the landlord has established the standards for its consent in the lease, it cannot object to a proposed assignment or sublease if the tenant has met the appropriate requirements. It is well established in Colorado law that "without a freely negotiated provision in the lease giving the landlord an absolute right to withhold consent, a landlord's decision to withhold consent must be...

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