Following last week’s posting about what Ruminations would call a misunderstanding regarding the economic theory behind the freedom to assign a lease, we received some calls to discuss how an assignment differs from a sublease. Given the frenetic activities involved in getting ready for this past weekend, Ruminations was happy to comply by taking advantage of what seemed like easy pickings – republishing a snippet from a piece written in 2008.
An assignment is not a subletting, and vice versa. The underlying considerations are not the same. By assignment, the new occupant – the assignee – becomes the tenant itself. Its right to possession of the premises is grounded in real property law—the law of conveyances. At the same time, only if the assignee assumes the lease will it be accepting a direct, contractual relationship with the landlord. If it does not assume the lease, the landlord and the assignee only have possessory obligations to each other, i.e., those obligations that run with the land, but not contractual obligations. But, absent an express agreement by the landlord to the contrary or the occurrence of some subsequent “releasing” event, the original named (assigning) tenant isn’t let off the hook. To effectuate a novation, i.e., a full substitution of the assignee for the assignor, the landlord must consent to the release of the assignor. After an assignment, unless the lease or any other document says otherwise, the landlord can look solely to the assignee to enforce any remedy under the lease even though its original tenant remains liable. Of course, if the original tenant is granted bankruptcy protection the original tenant may no longer have the secondary liability it once had as a former tenant under the lease even though the lease will remain in effect and the assignee will remain in possession.
Letting the law run its course may not lead to favorable or even expected results. For example, absent an agreement to the contrary, an assigning tenant, though still liable to its old landlord, is no longer primarily on the hook for a tenant’s lease obligations. Upon assignment, it becomes a surety for the obligations; its assignee becomes primarily liable for those obligations. If the assignee has not assumed the lease, but has only taken possession, it may not even be liable for some moneys owed under the lease, such as obligations to repay a loan. It also will not be financially liable for a prior default by its assignor even though it might lose the lease by reason of such a default. Further, the original assignee will not be liable for the obligations of a subsequent assignee, just for what happens while it is in possession of the leased premises.
So, think of the common and uncommon situations that can arise if a lease does not cover these gaps. If the lease (or a separate document, such as the consent to assignment document) doesn’t make the named tenant primarily liable for the obligations of subsequent tenants by assignment, a landlord may find itself with the equivalent of a guaranty of collection, not a guaranty of payment. That would delay the landlord in collecting what it is owed, and “to delay is to deny.” One remedy is for the lease to state that the named tenant, following an assignment of its leasehold interest, remains primarily liable for all the tenant’s obligations under the lease including those of all subsequent assignees. An even more potent provision would make the tenant and all assignees jointly and severally liable for all tenant obligations under the lease no matter when incurred.
As to each assignee, if a landlord wants all assignees to be contractually bound to the terms of the lease as if each were the original, named tenant, the parties can do so by way of the lease or by requiring an express assumption of the lease by each assignee as a condition of a valid assignment.
A subletting does not change the original landlord-tenant relationship. The subtenant is not in privity of contract with the landlord. It isn’t even in privity of estate with the landlord. It may have possession of the premises through its own (sub)landlord – the original tenant – but it isn’t liable for the debts and obligations of the named tenant. Notwithstanding the subletting, its landlord, the named tenant, remains in possession of the leased premises by reason of the lease. What the tenant has done, vis-a-vis the subletting, is to encumber its right of possession by conveying a portion (in time, space or both) to its selected subtenant. By that conveyance, the original tenant is in privity of estate with its subtenant.
In 1928, a Maine court described the difference between an assignment and a subletting when it comes to leasehold estates by writing: “…an assignment creates no new estate, but transfers an existing estate into new hands, while a sublease creates an entire new estate.”
It shouldn’t go unnoted that parties may self-characterize their transaction as a subletting or as an assignment, but the details of the actual possessory grant will trump any labels. The essential distinction between an assignment and a subletting is that in a subletting, the transferring tenant reserves some reversionary right. With the exception of some possible twists inherent in an “assignment pro tanto,” to be a subletting, the quantum of rights granted to a subtenant cannot be the entirety of what the purported sublandlord possesses. Plainly speaking, a subletting for the entire lease term and for the entire leased space can, and most probably will, be characterized as an assignment. Whether a withholding of some element of a contractual right, as distinguished from a possessory right, alone, will cause a purported sublease of the entire leased premises for the entire lease term to be treated as a subletting is a question of state law, with the answer, if findable at all, to be found in that state’s case law.