The 3-C's of Commercial Leasing
Commercial Leasing is complicated, crucial and costly. These three "C's" must be analysed carefully before assuming the responsibilities associated therewith. We have all heard the adage "location, location, location" – once that has been investigated you must then evaluate your term, options to renew and all of the "free" incentives you want Landlord to provide. Everything must be documented for future reference as unexpected changes will leave the contracting parties at the mercy of the Lease that should provide for all eventualities.
In difficult economic times, a tenant may find itself with an excess of space that it does not need and cannot afford. Assuming that the landlord will not allow the tenant to simply terminate all or part of the lease, the tenant may seek to assign its lease to a new party or sublet all or part of its premises. Such transactions often present competing interests among the three parties involved – the landlord, the tenant, and the subtenant/assignee. This outline will explore some of those competing interests.
As a general rule, if a lease contains no express restriction on assignment or subleasing, the tenant is free to transfer its rights in the lease without landlord's consent. This is in line with general principles in the law that disfavor restraints on the alienation of real property. Therefore, restrictions on a tenant's right to transfer its interest in the lease will be strictly construed, and ambiguities in such lease provisions will generally be interpreted in favor of transferability. However, the law recognizes a landlord's ability to restrain the tenant's right to transfer through express provisions in a lease.
An assignment of a lease is the transfer by the tenant of its entire interest in the lease without material alteration or addition to the terms of the lease and without the tenant retaining any reversionary interest in the lease. A sublease, by contrast, is a transaction in which the tenant transfers all or part of the leased premises for a portion of the unexpired term of the lease, or for the same term, but for a materially different rent or upon materially different terms and conditions, thereby retaining some reversionary interest in the premises.
Assignments and subleases are sometimes referred to interchangeably as a "transfer." A "transferee" refers to an assignee or sublessee, as context requires. The decision whether to assign the lease or sublet the premises requires an intensely fact specific analysis and will also depend on the relative leverage of the parties involved. If the tenant is a large national retailer with good credit, it may be imperative to the landlord that the original tenant remains liable under the lease. Thus, a sublease may be preferred by the landlord or an assignment where the original tenant remains liable. Conversely, a single store "mom & pop" operation teetering on the edge of failure may be a liability for the landlord. The bankruptcy of such a tenant can tie up the premises for an extended period of time and result in a termination of the lease. In such a case, the landlord may me more than happy to replace the failing tenant with a new, healthy tenant.
Please consult your professional advisors BEFORE making any binding or otherwise irreversible decisions. A letter of intent, the preliminary contract the outlines the business terms and conditions of a commercial lease can stand in the place of the lease should the parties fail to agree on the details. That is not a desirable situation for anyone and may require judicial intervention to settle the matters in dispute.
Elaine Rosenberg is corporate generalist attorney with substantial inhouse legal experience. She places a high premium on providing preemptive legal support in French or English. Her focus is on real estate development and commercial law, contract drafting and commercial lease negotiation.
