LEASE ASSIGNMENT AND SUB-LEASES

1. Lease Assignment- the transfer of an entire leasehold interest from a tenant to a third party.
Example:

Uno leases a residential property from Dos for one year, beginning January 1, 2023, and ending on December 31, 2023, at the rental price of
P60,000 per year or P5,000 per month. On March 1, 2023, with 10 months remaining on the lease, Uno and Tres agreed that Tres will occupy the
property for the remainder of the lease and that Tres will pay the P5,000 per month rent to Dos. In this case, Uno has “ assigned” his lease to
Tres.

LESSOR/LANDLORD Lease Agreement LESSEE/TENANT

(DOS) (UNO)

ASSIGNOR ASSIGNEE
(UNO) (TRES)
 LEASE ASSIGNMENT AND SUB-LEASES
2. Sublease- the transfer of part of leasehold interest from a tenant to a third party, in which the tenant keep a remainder
interest in leasehold estate so that the property will go back to the tenant before eventually reverting to landlord.
Example:

Uno leases a residential property from Dos for one year, beginning January 1, 2023, and ending on December 31, 2023, at the rental price of
P60,000 per year or P5,000 per month. On March 1, 2023, with 10 months remaining on the lease, Uno and Tres agreed that Tres will occupy the
property for the next six months or until August 31, 2023 for a rent of P6,000 per month. In this case, because Uno and Tres agreed that Tres will
assume less than the remainder of the lease, Uno has “sublease” part of the interest in the property to Tres.

LESSOR/LANDLORD Lease Agreement LESSEE/TENANT

(DOS) (UNO)

SUB-LESSOR SUB-LESSEE
(UNO) (TRES)
CONSENT CONDITIONED ON EXACTIONS

A commercial lease agreement entered into by a tenant contains an assignment and subletting provision, called
a restriction -on- transfer provision or a restraint-on-alienation provision.

The restriction-on-transfer provision either prohibits transfer of the tenant's interests or requires the landlord’s
consent prior to assigning, subletting or further encumbering the tenant's leasehold interest. If the provision permits
an assignment or subletting, it states the landlord’s consent Will not be unreasonably withheld.

Further, the lease agreement signed by the tenant contains a cancellation provision. The cancellation provision
allows the landlord to cancel the lease agreement and terminate the tenant's occupancy on the landlord's receipt of
the tenant’s written request to sublet the premises.

After taking occupancy, the tenant vacates the premises and relocates their operations to another property. The
tenant has no intention of returning to the leased premises.

The tenant finds a new tenant who will pay rent at current market rates for the space. The current market rates
exceed the rent owed under the lease agreement. The amount by which the current market rates exceed the rents
under the lease is called overriding rent.
CONSENT CONDITIONED ON EXACTIONS

The tenant requests the landlord's consent to sublease to the new tenant. The landlord responds by
cancelling the lease agreement and terminating the tenant's leasehold interest under the cancellation
provision.

The landlord, having terminated the tenant's leasehold by cancellation of the lease agreement, negotiates
directly with the new tenant. The landlord enters into a lease of the premises with the new tenant at current
rental rates.

The previous tenant makes a demand on the landlord for the overriding rent they lost due to the landlord's
refusal to consent to the sublease, claiming the landlord’s consent was unreasonably withheld since no
conditions for the consent were agreed to that entitled the landlord to the overriding rent.

The landlord claims their cancellation of the lease is valid, even though cancellation is an absolute restraint
on the proposed transfer of the tenant's leasehold interest. The tenant and landlord bargained for the
cancellation provision that was triggered by the tenant's request for the landlord's consent to a sublease.

May the landlord cancel the lease agreement on receipt of the tenant's request for consent to an assignment
even though they agreed not to unreasonably withhold their consent?

Yes! The two provisions in the lease, the consent-to-assignment provision and the cancellation
provision, are mutually exclusive alternative remedies. They give the landlord a choice between two
different and separate courses of action when confronted with a request for consent to a sublease.
CANCELLATION NULLIFIES THE NEED TO CONSIDER REQUEST FOR CONSENT

In the previous example, the landlord exercised the cancellation provision on receipt of the tenant's request for
consent. Thus, the tenant is relieved of any further obligation under the lease agreement. Cancellation also
terminated the tenant’s right of possession and any potential profit between the lease agreement rent rate and the
property's appreciated rental value.

Thus, the issue as to whether the landlord refused their consent never arises. The landlord cancelled the lease as
agreed, nullifying any need to consider the request for consent.

If the landlord chooses not to cancel the lease agreement and terminate the tenancy on the tenant's request for
consent to an assignment, the landlord is then obligated to analyze whether or not to consent. In an analysis, they
are required to be reasonable about any objection they may have to the assignment since no other standard was
set in the lease.

The cancellation provision in the lease agreement is bargained for and not the unconscionable result of an
interference with an assignment of the lease.

Here, the tenant contracted away their leasehold right to retain the benefit of increased rental value of the property
by assignment or subleasing when they included the cancellation provision in the lease agreement. The leasehold
was eliminated by the cancellation of the lease agreement. With the lease agreement cancelled and the leasehold
terminated, the right to assign or sublet did not become an issue. Thus, the landlord did not interfere with the
tenant's right to assign or sublet since the leasehold no longer existed to be assigned or sublet.
TRANSFER OF ANY INTEREST

A restriction-on-transfer provision in a lease agreement typically calls for the tenant to acquire consent from the landlord
before the tenant may transfer their leasehold interest.

A transfer by the tenant includes an assignment, sublease or further encumbrance of the leasehold.

An assignment of the lease agreement transfers the original tenant's entire interest in the property to a successor tenant, leaving
no interest held by the original tenant. However, the original tenant named on the lease agreement remains liable for the
successor tenant's performance on the lease, even though the landlord consents to the assignment and the successor tenant
becomes primarily responsible for the lease obligations. The act of taking over a previous tenant's lease agreement and right of
possession is called an assumption.

For the original tenant to be released of their liability under the lease agreement on an assignment, a novation (also known as a
substitution of liability) is negotiated and entered into by the landlord and both tenants.

On the other hand, when entering into a sublease with a subtenant, the original tenant (or master tenant) transfers to the
subtenant less than all of the master tenant's interest in the property. Also, possession reverts back to the master tenant on
expiration of the sublease.
The master tenant granting the sublease remains obligated to perform on the master lease agreement. The subtenant does not
assume liability of the master lease. However, the subtenant may not act in any way that constitutes a breach of the master lease
agreement. A copy of the master lease agreement is provided to the subtenant as an attachment to the sublease.

The further encumbrance of a tenant's leasehold interest is a transfer and occurs when the tenant places a lien on their leasehold
to secure a mortgage, such as a trust deed or a collateral assignment.
VARIOUS ALIENATION PROVISIONS

Leases include various types of restriction-on-transfer provisions, which may:

1. entirely prohibit any assignment of the tenant's leasehold interest;

2. require the landlord’s consent prior to an assignment without referencing approval standards or placing any
monetary conditions on the tenant for obtaining the landlord's consent, called exactions.
3. require the landlord's consent prior to an assignment, stating consent will not be unreasonably withheld;
4. require the landlord's consent, subject to conditions first being met by the tenant or
5. contain conditions for a valid assignment without requiring any consent from the landlord.

Approval standards lay out the analytical process to be applied by the landlord when judging whether or not to
withhold consent.

Monetary conditions are sums of money or modified leasing terms to be met by the tenant as a pre-requisite to the
landlord's consent.
NO STANDARDS FOR WITHHOLDING CONSENT

Consider a lease agreement with a restriction-on-transfer provision calling for the landlord’s consent
prior to the tenant’s assignment. However, the lease does not contain any standard or condition for
the landlord's consent.

Here, for lack of agreement to the contrary, the standards and conditions for the landlord's consent
are set by law.

Any lease agreement entered into without stating a standard for the landlord's consent to an
assignment, requires the landlord to have a commercially reasonable basis for any denial of consent.
The landlord cannot arbitrarily deny consent.

Also, the landlord may not impose conditions on the consent, such as a higher rent rate, unless the
condition was included in the lease agreement
COMMERCIAL REASONABILITY STANDARDS.

Commercial reasonability standards relate to the landlord's ability to:

1. protect their ownership interest from property waste and financial deterioration caused by the
conduct of the successor tenant; and

2. ensure the future performance of the lease by an assignment to a creditworthy tenant.

Commercially reasonable objections for withholding consent to an assignment include:

1. the successor tenant’s financial responsibility, net worth, prior operating history and
creditworthiness;

2. the successor tenant’s intended use, care and maintenance of the property; ·

3. the suitability of the successor tenant's use, product marketing and management style for the
property; and

4. the need for tenant alterations to the premises.

REASONABLE INCREASES IN RENT

Consider a commercial tenant who agrees to a percentage lease.

The restriction-on-transfer provision in the lease agreement requires the tenant to obtain the landlord’s consent before
assigning the lease. The provision does not include standards or conditions for the landlord's consent to an assignment.

The tenant enters into an agreement to sell their business and assign the lease to a new operator. The operator buying the
tenant's leasehold interest (and the business) is to pay the tenant the overriding rent over the remaining life of the lease.

The tenant requests consent for the assignment of the lease agreement from the landlord. On investigation, the landlord
determines the operator will manage the business in a manner that will not generate gross sales at the same level as the current
tenant. Thus, under the percentage lease, the new operator will not become obligated to pay the amount of rent currently being
paid by the tenant seeking consent.

However, the landlord agrees to consent to the assignment conditioned on the landlord receiving the overriding rent premium the
tenant is to be paid for the assignment.

The tenant claims the landlord cannot condition consent on exacting the rent premium since no standards or conditions for
consent exist in the lease and thus cannot now be imposed.

Here, the landlord's conditional consent to the assignment is commercially reasonable. When granting consent, the landlord is
entitled to preserve the rental income they currently receive from the existing tenant. The landlord does not need to accept the
certain risk of a lower monthly percentage rent from the assignee while the original tenant receives a monthly premium.
Section 4. of Rent Control Act of 2009 (RA 9653)

Limit on Increases in Rent. –

For a period of one (1) year from its effectivity, no increase shall be imposed upon the rent of any residential unit covered by
this Act: Provided, That after such period until December 31, 2013, the rent of any residential unit covered by this Act shall
not be increased by more than seven percent (7%) annually as long as the unit is occupied by the same lessee: Provided,
further, That when the residential unit becomes vacant, the lessor may set the initial rent for the next lessee: Provided,
however, That in the case of boarding houses, dormitories, rooms and bedspaces offered for rent to students, no
increase in rental more than once per year shall be allowed.