Lease agreements are meant to serve a useful purpose for businesses – the ability to rent space, at a reasonable price, for an agreed-upon period of time. What could be better for a small business, especially those without the capital or credit to purchase real estate? Well, one problem can be the length of the lease. Small businesses fail all the time. People move all of the time. Businesses sell all of the time. See where I’m going with this?
The problem with commercial lease agreements is that it can be hard to predict whether a commercial tenant will be able to fulfill the entire term of a lease or lease extension. This is why most commercial landlords require small business tenants to sign a personal guarantee. If your company cannot fulfill the terms of the lease, they can then hold you personally accountable for any unpaid rent and other damages.
Here’s a fun quote to start us out – “Liberty to contract carries with it the right to exercise poor judgment as well as good judgment. It is the simple law of contracts that as a man consents to bind himself, so shall he be bound.” Courts are generally reluctant to change the terms of a contract. If you sign something, you’d better be willing to live up to it.
Safest Course
The safest course for a tenant is to make sure that the contract allows for assignment or sublease, in case they need to back out before the end of the lease term. The safest course for the landlord is to ensure that they can hold the original tenant liable for the entire rental term. The best compromise for both parties, then, would be some middle ground. How can this be done?
Well, you can include the ability to assign or sub-let a lease, but only with the express written consent of landlord. Whether that consent can be unreasonably withheld is another question. While landlords might like the ability to withhold consent for any reason, it’s up to the parties to determine whether consent can be withheld, and for what reasons.
Landlord Withholding of Consent
Generally, landlords should be able to withhold consent for the assignment or sublease of a property if it is going to cause any sort of economic harm to the building or neighboring tenants. For example, if you’re attempting to sub-let your office space to a financial advisor when there’s already one next door, the landlord should be able to deny that assignment.
However if a proposed sublease or assignment would provide a substantially similar tenant, and that type of business works well in the space, the landlord should provide consent. For example, if you are attempting to sub-let a coffee shop, and the proposed tenant is another coffee shop, then it would seem to be a perfect fit.
Lease Assignment Consent Factors
With all that said, here are some factors to use in a lease agreement that may provide clear and consistent guidelines for a reasonable assignment or sublease, assuming that the landlord will allow such a provision in any given agreement:
- Financial responsibility of the proposed subtenant;
- The identity or business character of the subtenant and its suitability for the particular building; and
- The legality of the proposed use of the premises.
I hope this has been useful for you, and if you have any questions or would like further information, please don’t hesitate to contact us.