Sublease and Assignment Clauses Explained

The clause usually covers both, and landlord forms often restrict them in the same sentence, but they work differently.

• Assignment. You transfer your entire interest in the lease to another party for the rest of the term. The assignee becomes the tenant and deals directly with the landlord.
• Sublease. You remain the tenant and rent all or part of the space to a subtenant, for all or part of the remaining term. The subtenant pays you, and you continue to pay the landlord.

In both cases the original tenant typically stays liable to the landlord unless the landlord signs a release. After a sublease you are still the tenant. After an assignment, most leases keep you responsible if the assignee later defaults. A release on assignment can be requested, and landlords sometimes agree when the assignee has clearly stronger credit, but do not assume it.

A third category, transfers by operation of law or by a change in ownership of the tenant company, is often written into the same clause. That subject has its own guide, linked below.

Most office leases contain no right to terminate early. If the company outgrows the space, shrinks, moves to another city or changes how often people come in, the lease obligation continues unchanged. The practical ways out are a buyout the landlord agrees to, or a transfer to another occupant.

A landlord-friendly transfer clause can close that second door without appearing to. Consent can be withheld at the landlord's discretion, the landlord can take the space back when it suits it and refuse when it does not, and any financial benefit goes to the landlord. A tenant in that position discovers the problem only when it needs to act.

For a company whose headcount and funding can change within a single lease term, a workable transfer clause deserves as much attention in negotiation as the rent.

Nearly all leases require landlord consent to a transfer. The question is how much freedom the landlord has to say no.

• Sole discretion. The landlord may refuse for any reason. This effectively gives the landlord a veto over your exit.
• Not unreasonably withheld. The landlord must have a reasonable basis to refuse. This is the standard tenants should seek, extended to "not unreasonably withheld, conditioned or delayed" so that approval cannot be slowed or loaded with new demands.
• Defined reasonableness. Many leases go on to list grounds on which refusal is deemed reasonable. Read this list closely, because a long list can undo the standard.

Commonly listed grounds include the proposed occupant's financial strength, its intended use, and whether it is a government agency or otherwise unsuited to the building. Tenants should look hard at three others that landlords often add:

• A ban on subleasing to existing tenants or occupants of the building, or to anyone the landlord has recently negotiated with. In a large building this can remove your most likely subtenants. Ask that it apply only when the landlord has comparable space available to offer them.
• A ban on marketing or subleasing below the landlord's current asking rent. Sublease space generally leases at a discount to direct space, so a pricing floor can make a sublease impossible.
• A requirement that the subtenant's credit match yours at signing. The relevant question is whether you remain liable, which you do.

Add a response deadline. The lease should require the landlord to approve or refuse within a stated period after receiving a complete request, and should say what happens if it does not respond. Subtenants do not wait indefinitely.

A recapture clause lets the landlord respond to your transfer request by terminating the lease for the space in question and taking it back, instead of approving the transfer. Landlords want this so they can deal directly with a good prospect or reclaim space in a rising market.

Recapture is not always bad for the tenant. If your goal is to be rid of the space, a landlord that takes it back has released you from it. The harm comes from uncertainty and timing: you may spend months and brokerage fees finding a subtenant only to have the landlord step in at the end, or the landlord may recapture a portion you intended to sublet temporarily and want back later.

Protections to negotiate:

• Trigger recapture early. Let the landlord elect to recapture when you give notice of your intent to market the space, before you have invested in finding a subtenant. If the landlord declines, you are free to proceed for a set period.
• A right to withdraw. If the landlord elects to recapture, allow yourself to rescind the request and keep the space.
• Limits on scope. Exclude short subleases, subleases of a small portion of the premises, and transfers to affiliates or successors.
• Clean release. If the landlord recaptures, you should be released from obligations for that space from the recapture date, with rent and any deposit adjusted.
• Partial recapture. If only part of the space is taken, the landlord should bear the cost of separating it.

If a subtenant or assignee pays more than you owe under the lease, the landlord will want a share of the excess, and sometimes all of it. A sharing arrangement is common and generally accepted. The definition of profit is where the negotiation lies.

A fair definition lets you first recover what the transfer cost you before any excess is split. Those costs typically include brokerage commissions, legal fees, improvement work or allowances you provided to the subtenant, free rent you granted, and the rent you paid while the space sat vacant during marketing. Some tenants also negotiate recovery of the unamortized cost of their own improvements.

Check as well whether profit is measured over the whole sublease term or period by period, and whether payments for furniture or equipment you sell to the subtenant are excluded. In practice, sublease profit is uncommon, because subleases tend to lease below direct rents. The clause matters most in a strongly rising market, and it should not be written so that it penalizes you in an ordinary one.

• ✓Is consent subject to a "not unreasonably withheld, conditioned or delayed" standard, with a response deadline?
• ✓Do the listed grounds for refusal include restrictions on building occupants, pricing floors or credit tests we should narrow?
• ✓Does the landlord have a recapture right, and can we withdraw our request if it is exercised?
• ✓Is sublease profit shared only after we recover all of our transfer costs?
• ✓Are transfers to affiliates and successors permitted without consent, recapture or profit sharing?
• ✓Do our renewal, expansion and termination options survive an assignment, or are they personal to us?
• ✓What review fee and legal costs can the landlord charge for considering a request, and are they capped at a reasonable amount?
• ✓Will the landlord consider a recognition agreement for a subtenant of a full floor or other large block?
• ✓Can we share space with service providers, contractors or portfolio companies without it counting as a sublease?

The last item is easy to overlook. Tech companies often host contractors, vendors or affiliated teams, and a strictly drafted clause can treat that as an unapproved sublease. A short carve-out for desk sharing with business affiliates avoids the issue.

Have your attorney review the full transfer article. Tenant Advisory Group negotiates these terms as part of every lease we handle, and when a client later needs to shed space, we market the sublease and manage the consent process with the landlord.