CIP Blog

Back to our section by section review of leases.

 Assignment and subleasing. 

 This can sometimes be a contentious issue (but then again what isn’t in commercial leases?).

Here are the basics…a tenant has a lease at a certain piece of property.  The tenant wants to move out, shrink their space, or bring in another business to the property.  They can do this for any number of reasons: maybe they need someone to help cover their cost; maybe they have out grown their space and need to expand; or maybe they are going out of business and want to find another tenant for the landlord.

In general, a sublease is a legal agreement where tenants transfer their interest in the leased premises to a subtenant.

If you are tenant, read your lease. A tenant’s right to enter into a sublease may be expressly prohibited or restricted by the landlord. These restraints are usually clearly expressed in the lease/rental agreement or the courts will not enforce them. Landlords usually require written consent to subletting. 

If you are landlord, I would suggest getting this language inserted in your lease. You need to protect yourself.

A sublease is a contractual relationship between the tenant and the subtenant. The relationship between a tenant and a subtenant is essentially the same as the relationship between the landlord and the tenant. In general, the liabilities of the parties to each other are governed by the same rules that apply to the lease. From the time the subtenant takes possession of the leased premises, he/she becomes a tenant of the original tenant (I know, it’s confusing).

A tenant who subleases his interest in a leased premises to a third party (the subtenant) is not released from the obligations under the lease/rental agreement. The tenant is still liable to the landlord for rent and all other provisions contained in the lease.

There is no direct contractual relationship between the landlord and the subtenant. Therefore, the subtenant has no direct rights against the landlord under the terms of the original lease/rental agreement. This also means that a subtenant is not liable to the landlord for rent or for breach of any terms in the original lease agreement. However, the subtenant may be liable to the landlord if he/she expressly assumed the terms of the original lease/rental agreement.

In many ways an assignment is similar to a sublease except an assignment means you are transferring the total rights and responsibilities over the lease to another business. 

 Subleasing/Assignment Issues:

• Excess rent:  Some tenants will sublease their space at a rate higher than what they are paying and try to pocket the profits.  A landlord’s lease needs language to make sure the proceeds from any sublease are retained by the landlord, not the tenant.  If needed this can be a negotiating point later.

•  Use:  This is one of the reasons a landlord needs the ability in a lease to reject a sublease.  If a shopping center has a pizza restaurant (with the exclusive right to operate in the center) and a burger joint wants to sublease to a competitor of the pizza restaurant the landlord has to have the ability to reject this sublease.  If the landlord does not have this ability they could be sued for breach of lease with the original pizza restaurant.

• Liability:  The landlord needs to be protected in the event that the tenant tries to assign a lease to a tenant with poor credit.  You don’t want a Fortune 500 what may be in one of your office buildings to assign their lease to a shell holding company that can easily go bankrupt at any minute.  In many cases language is inserted in a lease that states the tenant can assign the lease so long as the new tenant (assignee) has a net worth greater than or equal to the first tenant (assignor) at the time the original lease is executed.

 Lots of details but very important ones.  As always, feel free to contact me if you have any questions. jcazana@ciprop.com or 865-584-3967.

 Sincerely,

 Justin Cazana, CCIM

Its been a while since I have been to New Orleans.  It is safe to say I have matured since I was last there.  Bourbon Street used to be a great place to have fun in college.  Now its just disgusting.  Seriously there should be an age limit just to walk down the street!  

New Orleans-2010 CCIM Mid Year Meetings

But if you are going to NOLA to eat…you have plenty of choices.  I had to privilege of eating at Drago’s, Red Fish Grill and the Pelican Club (twice).  All were fantastic, as expected.

The reason for the excursion was the CCIM Mid-Year meetings.  As the president of the Knoxville chapter I had the opportunity to sit down with several hundred CCIM leaders to discuss the direction of the commercial market as well as the how the CCIM Institute is growing.

If you are not familiar with CCIM; a Certified Commercial Investment Member (CCIM) is a recognized expert in the disciplines of commercial and investment real estate. A CCIM is an invaluable resource to anyone in commercial real estate.  If you are on this side of real estate it is imperative that you work with a professional with these four letters behind their name.

As you might imagine this economic cycle has been hard on commercial real estate, and the CCIM Institute is no different.  In his “State of the Union” CCIM President Richard Juge said that the institute has stayed above the projected budget and should break even for the year.

What is exciting is CCIM’s growth in technology and education.  For the past few years CCIM has improved its training and education plans to meet the needs of its candidates and designees.  That will continue over the next few years.   You can get many of the details from the CCIM website www.ccim.com (which is about to get a make over).  Many have considered the CCIM designation to be the equivalent of a graduate degree in commercial real estate; if anything it will be a more difficult and informative degree in the coming years.

The most impressive display of the weekend was the update on CCIMREDEX. This real estate exchange platform is the most comprehensive commercial real estate web site in the world.  The list of features is much to long to list here but the best description came from one of its creators Todd Kuhlmann.  He said REDEX is like the I-Phone; on its own there is not much to it…but when you add in all the apps it can practically run the world.   REDEX allows you to list a property and then send it out to all the other listing services you subscribe to with one touch of a button.  It can run demographic reports, create marketing flyers, create postcards to mail with just a few clicks of a button and even create flash-enabled web sites for your property.  I haven’t even come close to scratching the surface of what the platform can do.

If you are interested, and a CCIM member, REDEX training will be held in Knoxville on July 22nd.  I suggest you attend.

I would be remiss if I did not congratulate the three Knoxville realtors who earned their CCIM designations this week.  Solange Velas (Southland Realtors), Bill Beecher (Wood Properties) and Joyce Anderson (Caldwell Banker/Wallace & Wallace) all passed their final exam and earned the pin.   This is no easy feat; each broker completed more than 160 hours of education, a detailed portfolio (some are over 500 pages long) and passed a 6 hours final exam.  Congrats.

Justin Cazana, CCIM