Sublease vs. Assignment in Commercial Real Estate: A Guide for Landlords and Tenants

Commercial leases are long-term commitments. Businesses change. Properties change hands. Franchise networks expand and contract. At some point in the life of almost every commercial lease — whether office or retail — the question of subleasing or assignment will arise.

Understanding how these mechanisms work, what protections each party needs, and how to draft for a good outcome from the start is not just useful knowledge. It is the difference between a smooth transaction and an expensive dispute.

This guide is written for both sides of the leasing relationship.

Part One: The Difference Between a Sublease and an Assignment

Both tools involve the transfer of a leasehold interest from one party to another. The key differences are in how much is transferred, who retains liability, and what ongoing relationship is created.

Subleasing

A sublease occurs when a tenant leases all or part of their premises to a new occupant — the subtenant — for a period within the remaining lease term. The original tenant does not exit the relationship. They stay bound to the landlord under the head lease and become, in effect, a landlord to their subtenant.

In office leasing, this is the classic response to surplus space. A firm that signed a lease for 3,000 sf and now needs 1,500 sf can sublease the balance to another occupier, offsetting part of their rent cost while remaining in occupation. Partial subleases are common and, in major markets, sublease availability is tracked separately from direct vacancy because it tells a different story about the market.

In retail leasing, full subleasing of a tenancy is rare — most retail leases are structured around the tenant's entire footprint and a specific permitted use. Where retail subleasing does appear, it tends to be in concession arrangements: a department store licensing space within its footprint to a beauty brand or food operator. These have their own commercial and legal structure and are generally handled differently to standard subleases.

The liability position: The original tenant remains primarily liable to the landlord throughout. If the subtenant defaults on rent to the sublandlord, the sublandlord must still pay the landlord in full. The landlord has no direct claim against the subtenant unless the lease or a separate deed creates that right.

Assignment

An assignment is a full transfer of the tenant's remaining lease interest to a new party — the assignee. The assignee steps into the original tenant's shoes for the balance of the term, taking on all rights and obligations under the lease.

In office leasing, assignment typically arises through a business acquisition, corporate restructure, or a tenant who needs to exit the lease entirely. The incoming party may be the acquirer of the business, a related entity, or an unrelated third party who wants the space.

In retail leasing, assignment is the primary mechanism for transferring a retail business. When a retail operator sells their store, the lease transfers with it. This is especially significant in franchised retail, which is covered in detail below.

The liability position: The assignee becomes the primary obligor. However — and this is a point many tenants miss — the original tenant often retains residual liability unless the landlord formally releases them in writing. Signing over a lease does not automatically mean walking away clean. If the assignee later defaults, the landlord may still have a claim against the original tenant unless a formal release has been negotiated and documented.

Assignment of the Landlord's Interest

Assignment is not only a tenant mechanism. Landlords assign their interest too — and it happens regularly.

When a property is sold, the buyer acquires the landlord's interest in all existing leases. The incoming landlord steps into the outgoing landlord's position: they inherit the lease terms, the rent, the obligations, and any existing disputes or pending rent reviews. From the tenant's perspective, the lease continues unchanged, but their counterparty is now different.

This matters for several reasons. Tenants who have built a constructive working relationship with their current landlord may find that relationship reset. A new landlord with different investment objectives — more aggressive on rent reviews, less flexible on make-good, less willing to negotiate lease renewals — is a material change for any occupier.

For tenants, the key protections here are negotiated upfront: robust lease terms that do not depend on landlord goodwill for their operation, clearly documented side agreements or incentive arrangements (which must be deed-registered or otherwise binding on successors), and lease terms that bind the landlord's successors in title explicitly.

For incoming landlords, a thorough lease abstraction prior to acquisition is non-negotiable. Understanding every obligation — outstanding works, lease options, exclusivity provisions, pending reviews, make-good obligations — is fundamental due diligence. Inheriting surprises in a lease portfolio is an avoidable problem.

Part Two: Landlord Rights vs. Tenant Rights

The tension in sublease and assignment situations is straightforward: landlords want control over who occupies their asset, and tenants want flexibility to respond to changing business conditions. Both positions are legitimate. The lease needs to accommodate both.

The Landlord's Toolkit

Consent requirements are the landlord's primary control mechanism. Most commercial leases require the tenant to obtain prior written consent before subleasing or assigning. This allows the landlord to assess the financial capacity and suitability of the incoming party before they commit to accepting them as an occupier.

Legitimate grounds for withholding consent typically include insufficient financial covenant, a proposed use that conflicts with the lease or with exclusivity rights granted to other tenants, or a proposed tenant whose business would damage the property's presentation or reputation.

Recapture rights allow the landlord to terminate the existing lease when a sublease or assignment request is made, and to deal directly with the incoming party — bypassing the original tenant entirely. This is a powerful right that effectively lets the landlord veto a transaction not by refusing it, but by taking the space back and renegotiating on current terms.

Profit-sharing clauses are particularly relevant in retail. Where a tenant is able to assign or sublease at a premium above the passing rent — because they locked in a favorable deal years ago — many leases entitle the landlord to share in that upside. A 50/50 split on any rent above the head lease rate is a common starting position.

The Tenant's Toolkit

The reasonableness standard is the tenant's core protection. In most jurisdictions, landlords cannot unreasonably withhold or delay consent to a sublease or assignment. Courts have consistently found that vague objections, unexplained delays, or consent withheld purely for commercial advantage — rather than on legitimate grounds — expose landlords to damages claims.

Carve-outs for related entity transfers allow a tenant to assign to a parent company, a wholly-owned subsidiary, or an entity acquiring the tenant's business as a going concern, without requiring landlord consent. These carve-outs are enormously valuable in corporate contexts and should always be sought at lease negotiation.

Timeframe obligations on the landlord — typically 20 to 30 business days to respond to a consent request — prevent the landlord from sitting on an application while the tenant's commercial deal stalls.

Use clause flexibility matters most in retail. A narrowly drawn permitted use — "ladies' fashion retail only" — severely limits the pool of potential assignees. Tenants should push for broader use clauses, or for provisions allowing an application to vary the use in connection with any future assignment.

The Retail Franchise Layer

Franchised retail operations add a dimension to assignment that does not exist in office leasing, and it is one that catches parties unprepared more often than it should.

A franchisee typically holds the lease in their own name but operates under a license from the franchisor. The commercial lease and the franchise agreement coexist — and they need to be read together, because they interact directly when a transfer or exit is contemplated.

When a franchisee sells their business, the transaction involves two simultaneous transfers: an assignment of the lease (requiring landlord consent) and a transfer or novation of the franchise agreement (requiring franchisor approval). The incoming buyer needs both. If either party withholds consent, the deal fails.

This three-party dynamic — outgoing franchisee, incoming franchisee, landlord — requires careful coordination. The parties are often working to different timelines and different approval criteria. Having experienced legal and leasing advisors who understand both the real estate and franchise dimensions is not optional. It is essential.

When the franchisor reclaims a site — whether because the franchise agreement has been terminated, the franchisee has defaulted, or the term has expired — most franchise agreements give the franchisor the right to require the franchisee to assign the lease to the franchisor or a nominee. The head lease still requires landlord consent to that assignment, but in practice, landlords generally prefer a well-covenanted franchisor as their direct tenant over an individual franchisee, and consent is usually forthcoming.

From the landlord's perspective, understanding the franchise structure behind their retail tenants is genuinely valuable. A franchisee whose franchise agreement is expiring in 12 months, or who is in dispute with their franchisor, represents a risk that a landlord looking only at the lease would not see coming. Proactive landlords who develop relationships with the major franchise networks — and who have pre-agreed consent frameworks in place for approved network transfers — are better positioned and face fewer surprises.

Part Three: What Good Drafting Looks Like — The Win-Win Lease

The most effective way to handle sublease and assignment issues is to address them properly in the lease before either party needs to use them. A well-drafted lease creates a framework that protects the landlord's legitimate interests without unnecessarily constraining the tenant's flexibility — and both parties benefit from that clarity.

Here is what that looks like in practice.

What Landlords Need in the Lease

Clear consent criteria. Rather than leaving "reasonableness" undefined, a well-drafted lease sets out the specific grounds on which the landlord may refuse consent: financial covenant below a defined threshold, proposed use outside the permitted scope, demonstrated risk to the property or tenancy mix. This gives the landlord a defensible position and reduces the scope for dispute.

Recapture rights with defined trigger conditions. Recapture is a legitimate landlord tool, but unlimited recapture rights create uncertainty for tenants at the worst possible moment. The best outcome is a recapture right that operates within defined parameters — for example, only in response to a proposed below-market sublease, or only where the proposed assignee fails minimum financial criteria.

Binding successor clauses. Any obligations the landlord carries under the lease — approved fit-out works, incentive repayment obligations, agreed lease renewals — should be expressed to bind the landlord's successors in title. This protects both parties: the tenant knows their rights survive a property sale, and an incoming landlord knows exactly what they are acquiring.

Profit-sharing provisions that are workable. Profit-sharing is fair in principle, but provisions that are poorly defined — what counts as "profit"? after what deductions? — create disputes. A clearly drafted profit-share clause, with defined calculations and a reasonable sharing percentage, is better for both parties than a vague entitlement that has to be litigated.

What Tenants Need in the Lease

Defined timeframes for consent. The landlord must respond within a fixed period — 20 to 30 business days is standard — and failure to respond within that period should be deemed consent, or at minimum, a breach that entitles the tenant to remedies. Commercial deals cannot wait indefinitely for a landlord to act.

Affiliate and group company carve-outs. Transfers to a parent, subsidiary, or entity acquiring the tenant's business as a going concern should not require landlord consent, or at most should require notice only. These are internal corporate transactions that do not change the economic reality of the tenancy.

Broad permitted use provisions. The permitted use clause directly determines how easy or difficult it will be to find a subtenant or assignee in the future. Tenants should push for the broadest use description that is commercially reasonable, and should seek the right to request a use variation in connection with any assignment application.

Release on assignment. Where an assignment is completed with the landlord's consent and the assignee meets the financial criteria, the original tenant should be released from ongoing liability. A tenant who has done everything right — found a creditworthy assignee, obtained landlord consent, completed a proper assignment — should not carry indefinite contingent liability for what happens next.

Documentation of all landlord commitments. Incentives, contributions to fit-out, agreed works, lease option terms — everything the landlord has committed to must be in the lease or a deed that binds successors. A side letter that is not binding on a new landlord is worth nothing when the property is sold.

The Franchise Lease — Specific Drafting Considerations

Where the tenant is operating under a franchise agreement, the lease drafting needs to accommodate that reality explicitly.

Franchisor step-in rights should be clearly documented — either in the lease or in a separate deed between the landlord and franchisor. A well-structured step-in right allows the franchisor to take an assignment of the lease in defined circumstances (franchise termination, franchisee default, end of franchise term) and gives the landlord the certainty that the site will continue to operate rather than go dark.

Consent to network transfers can be agreed in advance. Where the landlord is comfortable with the franchise network as a whole, a blanket consent framework — allowing assignment from one approved franchisee to another within the network, subject to notice and basic financial criteria — removes the need for individual consent applications on every franchisee sale. This is efficient for everyone.

Inter creditor clarity matters where the franchisee has financed their fit-out or franchise fee through a lender who holds security over the business. On any assignment or insolvency, the interaction between the landlord's rights, the franchisor's step-in rights, and the lender's security needs to be understood and, where possible, documented before the situation arises.

Final Thoughts

Subleases, tenant assignments, and landlord assignments are all normal features of commercial real estate. They are not problems to be avoided — they are mechanisms to be understood and planned for.

The landlord who has drafted their leases carefully, understands their tenants' business structures, and responds to assignment and sublease requests efficiently will always have a more productive portfolio than one who treats every request as a threat.

The tenant who negotiated the right protections at lease execution — broad use clauses, affiliate carve-outs, defined consent timeframes, release on assignment — will always navigate a business change or exit more smoothly than one who signed a landlord's standard form without question.

The best commercial leases are not the ones that protect one party against the other. They are the ones that create a clear, workable framework for every scenario that might arise — because in commercial real estate, something always does.