How Privity Fits In
First things first! The legal principle of privity is relevant when it comes to assignments and subletting. Here’s a quick description that should help. There are two types of privity (a lease has both):
-
Privity of Estate: From a legal perspective, privity of estate exists when two or more parties (such as a landlord and tenant) have an interest in the same property. In this discussion, privity relates to the leased premises in which the tenant has an interest in the property (occupies the property as a tenant for a specified period) after which the estate (the landlord’s interest in the land) ultimately reverts back to the landlord when the lease ends.
-
Privity of Contract: The landlord and tenant also have privity of contract. In other words, both parties have signed a lease and only those parties to the agreement can enforce the lease terms.
Assignments
When an assignment occurs, the tenant’s entire interest in the lease is assigned to another party. Legally, the assignee assumes all lease obligations and the original tenant now doesn’t have privity of estate. but privity of contract (the signed lease) remains. As such, the original tenant continues to be responsible under the lease. BUT that depends on what the actual lease wording states. Note: That’s why it’s vital that any commercial lease be carefully scrutinized.
-
-
To protect the landlord’s interests, a well-written lease will require:
-
that the landlord must approve any assignment, and
-
that such approval is subject to terms and conditions that, among other things, determine the ‘approved’ assignee’s responsibilities regarding lease obligations. That includes whether or not the original tenant is off the hook (released from obligations).
-
Assignment Agreement To accomplish this, the landlord will typically require a formal lease assignment detailing how the tenant’s rights/obligations are transferred to the assignee (the new tenant). The assignment agreement effectively assigns both the privity of contract and privity of estate.
-
Subletting
A sublease is basically a transfer of all (or some portion) of the leased premises for a period less than the entire lease term. If a sublet is involved, no privity of estate exists and there is no privity of contract created between the subtenant and the landlord. Remember, a sublet is a temporary arrangement that ends before the original lease expires. Note: It might end just one day before lease expiry.
-
Subletting Agreement: However, as with an assignment, the landlord will seek certain written assurances. Lease terms will typically include the need for a formal subletting agreement. It typically requires that the subtenant complies with all covenants in the original lease to ensure that legal action can be taken against either the tenant or the subtenant for monetary or non-monetary breaches.
