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SUBLEASING AND ASSIGNMENT

Richard Moore

and

Seth Gustafson

BUCK & GORDON, L.L.P.

THE DIFFERENCE BETWEEN AN ASSIGNMENT AND SUBLEASE

Both an assignment and sublease are transfers by a tenant of its estate in leased premises.  However, an assignment transfers the tenant’s leasehold interest (for all or part of the leased space) for the entire term of the lease, whereas a sublease transfers the leasehold interest for only a portion of the term, with the sublessor holding a reversionary interest.  McDuffie v. Noonan, 176 Wash. 436, 29 P.2d 684 (1934).  Note that a “sublease” or other-named transfer of all or a portion of the leased premises for the entire term of a lease may be recognized judicially as an assignment.  Sheridan v. O.E. Doherty, Inc., 106 Wash. 561, 181 P. 16 (1919); Gazzam v. Young, 114 Wash. 66, 194 P. 810 (1921); Hockersmith v. Sullivan, 71 Wash. 244, 128 P. 222 (1912).  Courts will look at the substance of a transfer – rather than the form, character or title of the instrument making the transfer – in determining whether a transfer is an assignment.  Morrison v. Nelson, 38 Wash. 2d 649, 231 P.2d 335 (1951).  Subleases are often written to expire one day before the end of the lease term in an attempt to avoid being determined an assignment in disguise.

Assignments and sublettings have critical differences in the relationship between landlord, tenant and transferee.  In an assignment, the assignee steps into direct contractual privity with the landlord.  Either the landlord or the assignee can then sue the other directly to enforce the requirements of the lease.  Meanwhile, the tenant in the assignment technically remains liable under its contract with the landlord, unless the landlord and tenant agree otherwise.  Delano v. Tennent, 138 Wash. 39, 244 P. 273 (1926).  In addition, an assignee who subsequently assigns the lease to a third party remains liable under the lease if there is an express covenant to pay rent in the lease.  OTR v. Flakey Jakes, 112 Wash. 2d 243, 770 P.2d 629 (1989).  Note that there is a risk that a modification of the lease made by landlord and assignee may have the unintended effect of releasing the assigning tenant from liability under the lease (see Section 5 below).  

By contrast, in a sublease the landlord and subtenant do not enter into contractual privity; rather, a second contract – the sublease - arises.  The landlord’s lease with the tenant becomes in effect the “master lease,” and the subtenant is apportioned certain of these rights under the sublease.  If the master lease terminates, the sublease terminates as well.  It follows from this relationship that the subtenant cannot legally obtain via the sublease any greater rights to the space than the tenant has under its lease with the landlord.  McDuffie v. Noonan, 176 Wash. 436, 29 P.2d 684 (1934); Bennion v. Comstock Investment Corporation, 18 Wash. App. 266, 566 P.2d 1289 (1977) (sublease is terminated upon termination of master lease).  More important, in a sublease the only relationship the subtenant has is with the prime tenant (in their own landlord - tenant relationship), and the only relationship the landlord has is with the prime tenant.  Thus, absent special contractual agreements, the landlord has to look to the tenant (not the subtenant) if

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