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
REAL
ESTATE LAW
BY
ADAM F. ALDRICH
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. 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. Privity of contract allows enforcement
of the lease provisions, while privity of estate allows
enforcement of only those promises that run with the
land.
| 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. 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. 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. 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. 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. However, the subtenant's rights
will terminate with the original lease or when the landlord
declares a forfeiture of the tenant's lease
term.
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. 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. 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.
The
accompanying table illustrates the many differences between
an assignment, sublease, and partial
assignment.
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. Even if outright
prohibitions on assignments or subletting are enforced, such
provisions "are construed against the
restriction." This means a court generally will
construe such stipulations "against the party invoking
them" A breach of the restriction against
transfer does not terminate the lease, but may give rise
to a claim for default. 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. 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...
