You signed a 7-year office lease in 2022. Your company is shrinking — or selling — or moving. You have space you don't need, rent you're still obligated to pay, and two paths forward: sublease the space to a subtenant or assign your lease to someone else entirely.

Both get another party into the space. Both require landlord approval in most cases. But the financial, legal, and tax consequences diverge sharply — and most tenants make this decision without fully understanding what they're walking into.

This guide walks through every dimension: liability exposure, tax treatment, landlord consent standards, recapture rights, profit-sharing mechanics, and a step-by-step decision framework you can apply to your specific situation.

1. The Fundamental Legal Difference

What Is a Sublease?

A sublease is a transaction between the original tenant (now called the "sublandlord") and a new party (the "subtenant"). The original tenant transfers some — but not all — of its lease rights. Critically, the original tenant retains privity of contract with the master landlord. That means the master landlord can still come after the original tenant if rent isn't paid, if the subtenant causes damage, or if any lease covenant is violated.

Think of it like this: you hire someone to do your job for you, but you're still employed by the company. If the hire messes up, you get fired.

What Is an Assignment?

An assignment transfers the original tenant's entire interest in the lease to an assignee. The assignee steps into the original tenant's shoes. In a true assignment with novation (where the landlord agrees to release the original tenant), the original tenant has no further obligation. In most commercial leases, however, the original tenant remains secondarily liable — meaning the landlord must first pursue the assignee but can come back to the original tenant if collection fails.

Warning: Many tenants assume assignment eliminates their liability. In most U.S. commercial leases, the assignor remains liable unless the landlord explicitly releases them in writing. This is negotiated — it doesn't happen automatically.

The Partial vs. Full Transfer Distinction

A sublease can cover part of the space (e.g., sublease 3,000 of your 10,000 sq ft) or a portion of the remaining lease term. An assignment, by definition, transfers 100% of the remaining lease interest. If you want to retain any portion of the space or term, sublease is your only option.

2. Liability Comparison: Who Owes What?

Scenario Sublease Outcome Assignment Outcome
Subtenant/assignee stops paying rent Original tenant must pay master rent or face default Assignee liable first; original tenant secondarily liable (unless released)
Subtenant/assignee damages the premises Original tenant liable to landlord for repairs Assignee liable; original tenant may remain secondarily liable
Subtenant/assignee files bankruptcy Original tenant must pay; subtenant's trustee may reject sublease Assignee's trustee decides; original tenant secondarily liable if not released
Lease term expires Both master lease and sublease terminate Assignment continues until master lease expires
Holdover by occupying party Original tenant in holdover even if subtenant stays Assignee in holdover; original tenant risks secondary liability

The "Primary vs. Secondary" Liability Gap

In a sublease, the original tenant is always primary. There's no intermediate step — if the subtenant defaults on Tuesday, the master landlord can demand payment from the original tenant on Wednesday.

In an assignment without a release, the original tenant is secondary — but "secondary" still means real liability. Courts in New York, California, and most other states allow landlords to pursue assignors who haven't been released. The practical difference is procedural and timing-based, not absolute.

Real Dollar Example: Sublease Default Scenario

Original tenant: 5-year lease, $50/sq ft, 5,000 sq ft = $250,000/year master rent.
Sublease rate: $40/sq ft (below-market sublease).
Subtenant defaults at month 18 of a 36-month sublease, with 18 months remaining.
Original tenant exposure: 18 × ($250,000 ÷ 12) = $375,000 still owed to master landlord — regardless of subtenant's failure.

3. Tax Treatment: Where Assignment Often Wins

Sublease Income Tax Treatment

Rent received from a subtenant is ordinary income. If you're paying $50/sq ft and charging the subtenant $55/sq ft, the $5/sq ft spread is fully taxable at your marginal corporate or individual rate. For a corporation in the 21% bracket, that's a meaningful tax drag on any profit.

However, the original tenant can deduct:

Assignment Proceeds Tax Treatment

When an assignee pays a lump sum to acquire your lease (called a "lease bonus" or "premium"), the tax treatment is more nuanced:

Tax Factor Sublease Assignment (with premium)
Income type Ordinary income (rent spread) Potentially capital gain (one-time payment)
Federal tax rate (corporate) 21% 21% (corporate; no preferential rate for corps)
Federal tax rate (pass-through/individual) 37% marginal 15–20% long-term capital gains
Deductible costs Master rent, TI amortization, broker fees Unamortized basis, transaction costs
Timing of tax Spread over sublease term Year of assignment (lump sum)
Tax Strategy Note: Pass-through entities (S corps, LLCs, partnerships) often realize meaningful tax savings by structuring an exit as an assignment with a lump-sum premium rather than a sublease generating ordinary income over time — especially when the lease has significant below-market value. Model both scenarios with your CPA before deciding.

4. Landlord Approval: Standards, Tactics, and Recapture

The "Reasonableness" Standard

Most commercial leases require landlord consent to sublease or assign, with the most tenant-friendly leases adding: "which consent shall not be unreasonably withheld, conditioned, or delayed." Without this qualifier, the landlord has near-absolute discretion to say no.

Courts in most jurisdictions have found the following to be reasonable grounds for withholding consent:

Courts have found the following to be unreasonable:

Deemed Approval and Silence

Some leases — particularly post-2020 tenant-favorable forms — include a "deemed approval" provision: if the landlord doesn't respond within 15–30 days of receiving a complete consent request package, consent is deemed granted. These provisions are gold. If your lease lacks them, try to negotiate them in.

The Recapture Right: The Landlord's Hidden Power Move

Roughly 60–70% of commercial leases in major U.S. markets include a landlord recapture right. When you request sublease or assignment consent, the landlord can:

  1. Approve the transfer (original tenant transfers to subtenant/assignee)
  2. Disapprove (requires reasonable grounds)
  3. Recapture — terminate your lease and deal directly with the proposed transferee

Landlords exercise recapture when:

Recapture Risk Calculation: If you're paying $40/sq ft and the market is $65/sq ft, a landlord recapturing your 5,000 sq ft space could earn an extra $125,000/year. They will almost certainly recapture. Know your market position before sending a consent request.

Profit Participation Clauses

Many leases include provisions requiring the original tenant to share any sublease or assignment profit with the landlord — often 50/50 splits of amounts above the master rent. "Profit" is typically defined as sublease rent received minus:

Negotiate for the broadest possible deduction definition to minimize profit-sharing exposure.

5. Financial Modeling: Sublease vs. Assignment Math

Scenario: Tech Company Downsizing in San Francisco

Original lease: 15,000 sq ft, $72/sq ft/year gross, 3 years remaining.
Annual master rent obligation: $1,080,000.
Current market sublease rate: $55/sq ft/year.
Potential assignment premium (below-market lease): $180,000 lump sum.

Factor Sublease Assignment
Revenue over 3 years $2,475,000 (subtenant rent) $180,000 (one-time premium)
Master rent paid $3,240,000 $0 (transferred)
Broker fees + legal $185,000 $45,000
Subtenant TI/inducements $90,000 N/A
Net economic result -$1,040,000 loss (still pay $765K deficit) +$135,000 net (after costs, stop paying rent)
Ongoing liability Full — subtenant default risk remains Secondary (if no release)
Tax treatment Ordinary income on spread ($nil — at loss) Potential capital gain on $180K premium

In this above-market rent scenario, assignment wins decisively. The company stops writing checks for space it doesn't use and receives a premium. Under a sublease, it continues paying $25/sq ft/year more than it receives from the subtenant — a $375,000/year cash drain.

Scenario: Below-Market Lease in Austin — The Sublease Play

Original lease: 8,000 sq ft, $28/sq ft/year NNN, 4 years remaining.
Current Austin market rate: $48/sq ft/year NNN.
Sublease spread: $20/sq ft × 8,000 sq ft = $160,000/year profit potential.

Factor Sublease (4 years) Assignment (lump sum)
Revenue $1,536,000 (rent spread) $320,000 (estimated premium)
Master rent paid $896,000 $0
Transaction costs $120,000 $35,000
Profit-sharing (50% per lease) $260,000 to landlord $142,500 to landlord
Net result ~$260,000 net profit ~$142,500 net
Ongoing liability Full default risk Secondary only

Here sublease generates nearly double the net economic return, though with four more years of liability exposure. The right answer depends on the company's risk tolerance and whether the subtenant has strong credit.

6. When You're Selling Your Business

Business sale scenarios almost always involve lease assignment — the buyer takes over the premises as part of acquiring the business. Key considerations:

7. Negotiating the Consent Package

What Landlords Require

A complete consent request package typically includes:

  1. Written request identifying the proposed subtenant/assignee
  2. Financial statements (2–3 years) for the proposed party
  3. Business description and proposed use
  4. Draft sublease or assignment agreement
  5. Proposed effective date and term (for subleases)

Tenant-Favorable Consent Agreement Terms

8. The 12-Point Sublease vs. Assignment Decision Checklist

9. State-Specific Nuances

State Implied Reasonableness? Key Rule
California Yes — Civil Code § 1995.260 Landlord must state specific grounds for refusal; silence = unreasonable
New York Yes (Real Property Law § 226-b for residential; commercial by contract) Reasonableness implied if lease requires consent; courts examine economic harm
Texas No — must be in lease Without express clause, landlord has absolute discretion; negotiate "not unreasonably withheld"
Illinois Generally yes for commercial leases Landlord must act within reasonable time; silence can constitute waiver
Florida No statutory standard Courts look to lease language; absolute discretion if no "reasonably withheld" clause

10. Practical Timeline: What to Expect

From decision to executed sublease or assignment consent, typical timelines:

In hot markets with strong subtenants, this can compress to 6–8 weeks. In slow markets or with complex consent negotiations, allow 4–6 months.

Frequently Asked Questions

What is the main difference between a sublease and an assignment? ▾
In a sublease, the original tenant retains privity of contract with the landlord and remains fully liable if the subtenant defaults. In an assignment, the original tenant transfers all lease rights to an assignee. The assignor may remain secondarily liable unless the landlord provides a formal release.
Does a sublease or assignment require landlord consent? ▾
Most commercial leases require landlord consent for both. Landlords must typically act "reasonably" in withholding consent when the lease so specifies. Some leases also grant a recapture right, allowing the landlord to terminate the lease instead of consenting.
Who is liable if the subtenant stops paying rent? ▾
In a sublease, the original tenant (sublandlord) remains fully liable to the master landlord regardless of what the subtenant does. In an assignment, the assignee is primarily liable, but the assignor typically remains secondarily liable unless explicitly released in writing.
How are sublease profits taxed? ▾
Sublease income above the master rent is ordinary income. Assignment premiums (lump sums paid by assignees) may qualify for long-term capital gain treatment for pass-through entity owners, potentially reducing the tax rate from 37% to 15–20%. Always consult a CPA for your specific situation.
What is a recapture clause and how does it affect my decision? ▾
A recapture clause lets the landlord terminate your lease when you request consent to sublease or assign. The landlord then deals directly with the proposed transferee. Recapture is most likely in rising markets where the landlord can re-lease at higher rates. If your rent is significantly below market, any consent request carries recapture risk.
When should I choose assignment over sublease? ▾
Choose assignment when you want to exit the lease entirely, when the assignee is financially strong, when you're selling your business, or when above-market rent makes subleasing uneconomical. Choose sublease when you need flexibility, want to retain part of the space, or have below-market rent that generates a profitable spread.

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