ABCs of leasing: When it isn’t going to work

The lease is signed, you’ve moved in and you’re open for business.

Kelly Macysmic, ICR CommercialNegotiations were tough, but you were able to come to agreement with the landlord regarding the rate and term.

But the universe has thrown you a curveball. For whatever reason, you will not be able to complete the obligations of your lease agreement.

What do you do?

Get some advice

A lease is defined as a contractual arrangement calling for the lessee (tenant) to pay the lessor (landlord) for use of an asset.

Typically, this contract will include specific clauses to deal with virtually any rental scenario that could crop up, including early terminations. Landlords have seen and heard it all. Leases are somewhat proactive in that nature.

You should reach out to your agent to find out your next steps. Before proceeding with any course of action they will want to get in touch with the landlord to come up with something agreeable to them.

The most common solution will often be a sublease or assignment.

The tenant becomes the (sub)landlord

In a sublease the tenant, which we’ll call head tenant from here on in, agrees to rent their space to another tenant. By doing so, the head tenant also becomes what is referred to as a sublandlord.

From a landlord perspective not much changes: they keep collecting rent from the head tenant and communicating with the head tenant only.

The responsibility for the head tenant, though, ratchets up a notch.

Now the head tenant must collect rent from their subtenant. If they are unable to pay, the head tenant is still expected to cut their monthly cheque to the landlord.

Essentially the head tenant has landlord-like responsibilities to the subtenant; while remaining a tenant themselves. The head tenant is in this position until the end of the term.

The bonus is that if money is the hindrance to completing the lease obligation you’ve got that part solved with a solid subtenant.

Where do I (as)sign?

An assignment is another common way tenants can resolve the issue of vacating early. In an assignment, the landlord agrees to a new tenancy whom they will communicate with going forward.

No communication between the landlord and head tenant is typically required.

Most assignments, however, do not sever the relationship completely. For example, Company A is national tenant in a five year lease term.

Company A has excellent covenant with more than 50 locations across Canada and no history of shirking on their financial responsibilities.

But they have misjudged the market and need to close this location. Unfortunately, they have 18 months left on their lease.

They have found Company B to assign their lease to. But Company B is a new start-up and their covenant pales in comparison to Company A.

The landlord’s assignment document is likely to read that the assignment to Company B can proceed but should they go into default Company A will step back up.

Again, similar to a sublease, this arrangement typically only lasts until the remainder of the term.

Nothing in leasing is cut and dried

I should preface all blog posts, including this one, with the statement: this doesn’t always apply. There could be a variety of reasons a tenant is seeking to leave before a lease term is up.

Likewise, a landlord will have a number of ideas about what is best for their development.

My best advice is to bring your real estate professional back in to give you a hand. We may have information for both sides that will alleviate concerns for both parties in this uncomfortable situation.

No one should go into a contract looking for the out, but it’s important to understand that worst-case scenario.

Just in case.

I am a gal of all trades and wear a few hats at my current job though nothing quite as esteemed as my 1996 Unity Western Days Rodeo Queen crowned…

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I am a gal of all trades and wear a few hats at my current job though nothing quite as esteemed as my 1996 Unity Western Days Rodeo Queen crowned…

Read more

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