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Assignments & Subleasing: The Basics

INTRODUCTION


Assignments and subleases are commonplace. The difference between the two is a product of common law. This article will outline the fundamental differences between assignments and subleases, how the common law arranges the ongoing rights among the parties, and the advisability of certain express agreements that change the common law results.


First Comes, First: Definitions


The nature of the transfer depends on the quantity of interest in the property is transferred.. This distinction can be conceptualized easier by looking at each definition:


Assignment.


When a tenant transfers its entire interest in a leasehold estate, the transfer is an assignment. To qualify as such, the transfer must include the tenant's entire estate for the duration of the lease. For example, say Sally is an actress who has a 6 month filming gig out in Cannes but 6 months left on her lease. If she decided to transfer of all of the rights she had in her NYC apartment to her friend Monique for the remaining 6 months of her lease that would be an assignment.


Sublease.


In contrast, when a tenant transfers less than the remaining term or less than the tenant's entire estate the transfer is a sublease. For example, if Sally’s gig was only 4 months long and only sublet her apartment to Monique for 4 months, than to back the apartment for the remaining 2 months, it would be a sublease.


Determination of whether a tenant has retained a portion of the estate does not depend on the whether the tenant receives less rent than it owes under the lease, or even on whether the tenant transferred the entire premises. An assignment can occur regardless. But, retention by the tenant of even the smallest right with respect to the term constitutes a "reversionary interest" and creates a sublease.


For instance, courts would likely construe a transfer as a sublease if Sally retained an option to terminate, extend or renew the prime lease. In fact, the reversionary interest need not even be under the control of the original tenant to qualify the transaction as a sublease.


Surprisingly, one factor that does not distinguish an assignment from a sublease is the portion of premises involved. As long as the tenant relinquishes its interest in the portion of the premises transferred for the entire term of the lease, an "assignment pro tanto" occurs. Such a transfer carries all the legal implications of any other assignment, except that the assignee has liability for only a portion of the rent proportionate to the interest it receives in the premises. In our example, an assignment pro tanto if Sally assigned the rights to one of the bedrooms in her apartment to Monique for the remainder of the lease.


Most people would think that a sublease has occurred, because less than the entire premises has been conveyed. However, such a transfer creates a form of assignment. This means that the assignee will have privity of estate with the landlord, and may have privity of contract as well.


Do I Need Consent?


Many leases prevent tenants from assigning or subleasing (or subletting) the lease, primarily because the landlord wants to ensure the payment of rent and know who his or her tenant is at all times. Some leases allow assignments and subleases only when the landlord consents, and some state laws prohibit them unless the landlord consents.


When consent is necessary, the laws in almost every state require the landlord to act reasonably, that is, he or she can't refuse consent just because he or she doesn't "like" the original tenant. Nor can the refusal be based on discriminatory reasons, such as the sub-lessee or assignee's gender or race. But, refusal can be based upon the new tenant's inability to pay the rent or bad credit history.


Effects of the Transfer


Generally, unless the subtenant or assignee agrees, either as part of the assignment or sublease agreement or in a separate agreement, to assume, or accept, the original tenant's obligations under the original lease, the landlord can't enforce any of the lease provisions against the assignee or subtenant.


But, an assumption agreement does not release the original tenant from his or her obligations under the master lease unless the original landlord expressly agrees to such a release.


So, for example, under any residential lease, the tenant has the obligation to pay rent. After a sublease or assignment is made, the tenant still has that obligation, even if there was an assumption agreement. So, unless the landlord releases the tenant, the landlord can look to the tenant for rent payments if the subtenant or assignee fails to pay the rent.


As a tenant, you'll want to get a release from the landlord and an assumption agreement from the subtenant or assignee. As the landlord, in order to best guarantee rent payments, you'll want to insist on an assumption by the assignee/subtenant, and you don't want to release the tenant.


Generally, an assignment of a lease results in the assignee stepping into the shoes of the original tenant. The original tenant loses his or her right to live on the premises, and the assignee and the landlord are bound by the lease covenants or promises that run with land, that is, covenants that benefit the land, such as the covenants to pay rent and to make repairs.


Usually, the assignee can't avoid its responsibilities, especially liability for rent, by assigning the lease to someone else, and the original tenant is liable on the lease, including payment of rent, unless he or she was released from those obligations by the landlord.


In a sublease, unless the subtenant assumes the obligations of the master lease, there's no legal relationship between the subtenant and the landlord, and so the subtenant doesn't have to pay the landlord rent and the landlord doesn't have to respond to the subtenant's request or demand for repairs.


Rather, the landlord-tenant relationship is actually between the original tenant and the subtenant. Typically, you, as the original tenant, remain liable for rent: the subtenant will pay you rent, and you're responsible for paying the landlord on time. Also, you're obligated to perform all other covenants under the lease, such as making sure the property is not damaged.


The sublease should spell-out how various problems reported by the subtenant will be handled. For example, if the subtenant finds a problem with the premises, such as a leaky roof, he or she can't force the landlord to fix it, unless the subtenant assumed the lease. What will typically happen here is the subtenant would notify you, and you would have to fix the problem or enforce the landlord's obligation to fix it.


As practical matters, sublandlords and subtenants should protect themselves as any primary landlord and tenant would, such as having a detailed written lease that spells-out each party's rights and responsibilities and requires the payment of a security deposit.


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