When a business takes on a commercial lease, the focus is usually on moving in - securing the location, setting up operations, and getting trade underway. But circumstances change. A business may outgrow its premises, downsize, relocate, or even sell. When that happens, the question becomes: can the lease be transferred to someone else?
Commercial leases deal with this through clauses on assignment and subletting. These provisions are often overlooked at the start but can have significant consequences down the track.
Assignment vs Subletting
Although the terms are sometimes used interchangeably, assignment and subletting are different legal concepts.
Assignment involves transferring the lease to a new tenant (the assignee). The assignee steps into the shoes of the original tenant and takes on all lease obligations.
Subletting allows the original tenant (the head tenant) to lease part or all of the premises to another party (the subtenant), while remaining responsible to the landlord under the head lease.
For landlords, the key concern is maintaining control over who occupies the premises and ensuring the financial covenant strength of the occupant. For tenants, these clauses can determine whether they have flexibility to adapt their business without being locked into an unsuitable space.
Landlord’s Consent
Most commercial leases prohibit assignment or subletting without the landlord’s written consent. Unlike retail leases, where legislation requires that consent not be unreasonably withheld, no such statutory obligation applies to purely commercial leases in New South Wales.
That means the landlord’s position depends on the words of the lease. Some leases oblige the landlord to act “reasonably,” while others grant an absolute discretion. Even where reasonableness is implied by the courts, the bar is high and landlords are entitled to protect their legitimate commercial interests.
It is common for leases to set conditions before consent is granted, such as:
Requiring the incoming tenant to provide financial information.
Ensuring the premises will be used for an approved purpose.
Payment of the landlord’s legal and administrative costs.
Continuing Liability
One of the most significant risks for tenants is continuing liability.
Unless the lease specifically releases the outgoing tenant, the law presumes that the tenant remains liable for performance of the lease even after assignment. This means that if the new tenant defaults, the landlord can pursue the original tenant (and any guarantors) for unpaid rent and other obligations.
For tenants selling a business, this can come as a surprise. Without a negotiated release, obligations under the lease may continue long after the business has changed hands.
Subletting Complexities
Subletting brings its own challenges. Because the head tenant remains liable under the head lease, any breach by the subtenant can place the head tenant in default. For example, if the subtenant damages the premises or fails to comply with use restrictions, the landlord may hold the head tenant responsible.
Subleases also need to align with the head lease - a sublease cannot grant rights greater than those the head tenant enjoys. Drafting must be precise to avoid conflicts between the two documents.
Negotiation Points
For tenants, key negotiation points when reviewing assignment and subletting clauses include:
Release on assignment – seeking to be discharged from future liability once the lease is transferred.
Reasonableness of consent – ensuring the landlord cannot withhold consent arbitrarily.
Clear conditions – knowing upfront what information, costs, and approvals will be required.
For landlords, these clauses are about preserving flexibility and protecting the property. Requiring financial checks and maintaining control over permitted use are legitimate ways of managing risk.
Conclusion
Assignment and subletting clauses are often glossed over when a commercial lease is first signed, but they can become critical if the tenant needs to exit or restructure. Without careful drafting, tenants may find themselves still liable years after leaving, or unable to sublet part of their space when business needs change.
For landlords, these provisions are equally important in controlling who occupies the property and ensuring that the lease obligations continue to be met.
Understanding how assignment and subletting operate is only one part of navigating a commercial lease in NSW. Other key areas can also influence your rights and obligations throughout the term of your lease. You may find it helpful to explore:
As with all aspects of a commercial lease, the safest approach is to obtain legal advice before committing. Clarity at the beginning avoids disputes and protects both landlord and tenant if circumstances change.
Speak to an assignment and subleasing specialist
At Thornton + King our Law Society Accredited Specialist Property Lawyers have decades of experience advising clients in relation to transferring or assigning commercial leases and subleases. To speak to a specialist commercial leasing lawyer in relation to your assignment of lease or sublease, give us a call or submit an enquiry now.
