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When can a commercial tenant assign a lease to another business?

On Behalf of | Jan 11, 2024 | Real Estate Law

A commercial lease is a long-term commitment. New business tenants often agree to pay rent at a space for anywhere from two to five years. Occasionally, leases may have a duration of only one year or far longer than five years depending on the circumstances.

There is an expectation that a tenant should pay rent for the duration of the lease, regardless of what else happens. Throughout the duration of the lease, a commercial tenant could experience substantial changes to business operations. The company may thrive, growing far faster than the owner expected. Other times, the new lease was part of an expansion that may not work, meaning the company cannot generate enough revenue at the new facility to justify keeping it open. The company may also require new space or a different type of commercial space for optimal financial returns.

Typically, commercial tenants cannot just walk away from a lease. When might they be able to assign an existing lease to another company?

When the lease allows outside assignment

Some landlords work language into their commercial leases addressing lease assignment. Frequently, landlords prohibit lease assignments, especially without written pre-approval from the landlord. However, sometimes commercial landlords include clauses that specifically permit lease assignment. If a struggling tenant finds another party willing to take over their lease, their landlord may need to allow the assignment if their lease indicates that having another party assume the lease is a viable option.

When the business files for bankruptcy

During a business bankruptcy, there are many issues that the filer must address. Existing executory contracts, including commercial leases, are often a major issue in business bankruptcy proceedings. Even if a landlord does not permit lease assignments, they may have to consider allowing them if a commercial tenant files for bankruptcy. Assigning a lease to another party is one of several possible solutions for future commercial lease obligations during a business bankruptcy.

It can take a lot of work to find a party willing to assume a lease for a commercial space. Establishing whether a lease assignment of this kind is theoretically possible is an important step to take before a business invests effort in negotiating a lease assumption with another company.