SURRENDER, ASSIGNMENT, OR SUBLEASE – A TENANT’S GUIDE TO CHANGING LEASE CIRCUMSTANCES

Posted by Dasha Kovalenko-Gormack on April 23 2024 in News

If you are a tenant that leases its premises, and your plans change, you should be aware of the options available to you in terms of parting with possession of the premises:

Your options in that instance are likely to be:

1. Surrender of lease
2. Assignment of lease
3. Subleasing

Before considering these options, your starting point should always be to review and understand what is permitted under the lease, as this will record your ability (if any) to surrender, assign, or sublease.

1. Surrender

A surrender of lease is essentially an agreement between the parties to terminate the lease.

Sometimes, parties may negotiate provisions into the lease at the start, which allows them to surrender the lease. An example of this can be a surrender of lease in the event of development. The landlord may wish to have the ability to surrender the lease by giving notice to the tenant if the landlord wishes to redevelop the premises or the land on which the premises are situated. The commercials will also usually reflect this additional right of the landlord, whereby the landlord may be more inclined to give a tenant a reduced rental if the landlord wants such an ability to redevelop.

If the lease does not contain surrender-of-lease provisions, the parties can still negotiate and agree to surrender the lease. However, this usually involves the tenant paying the landlord a surrender fee to compensate for early termination, equivalent to the annual rental until the end of a current term.

2. Assignment

An assignment of lease is when a new tenant takes on the existing lease and all the previous tenant’s lease obligations, essentially stepping into the original tenant’s shoes and having a direct relationship with the landlord. The assignment ends the original tenant’s right to possession, but its liability under the lease, unless otherwise negotiated, generally continues.

The lease will generally record that landlord consent is required for a tenant to assign its lease (or sublet part or all of the premises). The landlord is entitled to include conditions, for example, a requirement that the tenant proves the assignee is “respectable, responsible, and has the financial resources to meet the existing tenant’s obligations under the lease”. Notwithstanding this, the landlord must act reasonably when deciding whether to grant consent.

3. Sublease

A sublease is where the tenant subleases part or all of the premises to another party, in which case the tenant becomes a sublandlord, and the other party is the subtenant. The original tenant retains its rights and obligations under the head lease but subleases the leasehold estate to another party, who is the subtenant. There is no direct relationship between the subtenant and the head landlord, and the original tenant remains liable.

The lease document will either expressly forbid subletting or include certain conditions for the landlord to agree to subletting. As with assignment, reasonableness is required from the landlord if the sublease consent is withheld.

4. Options

Your personal circumstances and the wording of the lease will often determine which option suits you best.

Understanding your obligations and ensuring you seek legal advice before electing an option is essential. Failure to understand your obligations can put you in breach of the lease and potentially worsen the circumstances that require you to dispose of the premises in the first place. 

If you would like more information or guidance regarding the above, please get in touch with:

Dasha Kovalenko-Gormack | Senior Associate | dasha.kovalenko@shieffangland.co.nz

Richard Hatch | Partner | richard.hatch@shieffangland.co.nz