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Bulletin | Article

Transferring a Commercial Lease: an Increasingly Popular Decision, but One That Must Be Well Thought Out

Fasken
Reading Time 6 minute read
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Real Estate Law Bulletin

In the current context, where working remotely is the norm and fear of a second wave of Covid‑19 is predominant, many business owners and executives are considering transferring their commercial leases. In fact, there has already been a significant increase in the number of offers to sublet in various commercial leasing markets in both Canada and the United States. This can be explained both by the popularity of working from home among many employees, and by employers perceiving this popularity as an opportunity to reduce their long-term financial burden by reducing rent-related expenses. Moreover, this transition to a working environment better adapted to the perils of the pandemic enhances employee safety and is satisfactory for both employees and their employers.

When contemplating a lease transfer, it is important to clearly identify the objective sought to be achieved by this transaction. As most commercial leases have provisions on transferring the lease, careful analysis of the rights and obligations of the parties is necessary before negotiations begin. Fully understanding the interests of each of the parties to the lease will facilitate reaching a mutually satisfactory agreement.

The following is a brief overview of the factors to consider when transferring a lease.

Objective sought

Generally, lease transfers are aimed at reducing the size of the leased premises and, consequently, the amount of the rent. In some cases the goal is the complete termination of the activities of the lessee at a given address. A transfer could also be concluded in order to create a shared workspace with a subtenant with whom there is a synergistic relationship and reciprocal benefits in working side by side.

Appropriate vehicle

It should be noted that there are two principle ways to transfer a lease, namely assignment and subletting.

There is a fundamental difference between subletting and assigning a lease, so an appropriate choice must be made between the two when contemplating a lease transfer. In the case of a sublet, the contractual nexus between the lessor and the lessee remains in effect, while a third party, the sub-lessee, undertakes to the lessee to respect various obligations in order to use all or part of the leased premises. In the case of an assignment, the contractual nexus between the lessor and the lessee is severed, and a third party, the assignee, undertakes to the lessor to respect the provisions of the lease in lieu of the original lessee.

In light of the foregoing, it is important to carefully consider the goal sought to be achieved by the transfer, and the most appropriate vehicle for consummating it.

The rights and obligations under the lease

Most commercial leases have a specific clause on transferring the lease. A review of the clause will allow the reader to quickly determine if there are any restrictions on subletting or assignment, and to identify the rights and obligations of each of the parties in this regard. By way of example, the following stipulations are often found in commercial leases:       

The lessee must not be in default under the lease

In most cases, the lessee’s bargaining power and even its right to transfer the lease will be affected if not imperiled if it is in default under the lease, whence the importance for the lessee of thoroughly knowing and understanding all its obligations under the lease. Before entering into negotiations, the lessor should thus pay specific attention to the lessee’s particular situation in order to determine if it is meeting all its obligations or has done so in the past, for example by consulting the personnel in charge of managing the building housing the leased premises, and obtaining an up-to-date statement of account of amounts due and payable by the lessee.

The lessee is to remain solidarily responsible for the obligations under the lease

The decision to transfer the lease may be fraught with consequences since, depending on the agreement reached between the parties and the terms of the legal documentation, the lessee may find itself responsible and liable for the actions (and defaults) of the transferee after the transfer. As the term of a commercial lease is often a period of several years, this could translate into an onerous legal and financial burden, whereas astute negotiations can often lead to a satisfactory compromise in this regard.

Consent of the lessor and financial guarantees

Upon the transfer of a lease, the lessor runs the risk of ending up with a lessee whose conduct is problematic, who turns out to be inappropriate for the leased premises, or who fails to pay the rent. Consequently, the terms of the lease will often make a transfer conditional on the lessor’s consent and the provision of financial guarantees in its favour.

Agreement in writing

A written sub-lease or lease assignment agreement may be required in order to have a lasting record of all the terms and conditions governing the transfer of the lease. In any event this is sound practice since, as the saying goes, “Words flit away, but writings stay.”

In all cases, attentive reading of the lease is called for and can allow other obligations to be identified that, while not directly concerning a transfer of the lease, should be given careful consideration (such as a clause specifying how the premises may or may not be used, or a right of termination). In the province of Québec, as always, if no transfer clause is included in the lease, the provisions of the Civil Code of Québec are there to guide the parties in their negotiations.

The interests of each party

Apart from the obligations of each of the parties, many factors can influence them and enhance the prospects for a successful negotiation. Accordingly, before any negotiations, both the lessor and the lessee should consider the interests and incentives of their counterpart as regards the transfer of the lease, and strive to find acceptable solutions. Here are some examples:

  • A lessor concerned about losing a reliable tenant could be reassured if the proposed sub-lessee or transferee is someone it already knows (e.g. a tenant who leases other premises from that lessor);
  •  To minimize the lessor’s losses, the lessee or sub-lessee could assume the cost of preparing the legal documents;
  • The transfer could be an opportune time to negotiate a longer term for the lease;
  • If the lessee is experiencing financial difficulties, the lessor could be favourably disposed to a transfer of the lease, in order to avoid the risk of being stuck with an insolvent lessee.

Caveat regarding eligibility for CECRA

In the specific context of the Covid-19 pandemic, a lessee who is receiving Canada Emergency Commercial Rent Assistance (CECRA) would be wise to consult a legal advisor before undertaking to transfer its lease. Depending on the lessee’s individual situation, transferring the lease could render it ineligible for CECRA, or necessitate entering into a separate agreement, for example.

Conclusion

Whether you are a lessor or a lessee, be sure to identify the objectives sought in transferring the lease and to choose the correct vehicle (assignment or sublet). You should also identify the applicable clauses of the lease and fully understand all their ramifications before beginning any negotiations, which in any event should be predicated on the interests and incentives of each party. If you are in any doubt or require assistance in preparing or reviewing the legal documents involved in subletting or assigning a lease, be sure to consult with your legal advisors.

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