Subleases Masquerading As Assignments
July 29, 2009 by Robby Scott Hill
The operative phrase is “entire interest” and whether or not this refers to the time left on the lease or the percent acreage. You can have a legal assignment of 100% of the acreage, but there must not be any time remaining on the lease term which will revert back to the assignor, otherwise what you’ve really got on your hands is a sublease of 100% of the parcel.
What is an assignment of a lease?
An assignment occurs when a tenant transfers away the entire remainder of his lease, in terms of duration.
Real property rights can be assigned just as any other contractual right. However, special duties and liabilities attach to transfers of lease interests. With an assignment, the assignor transfers the complete remainder of the lease term to the assignee. The assignor must not retain any sort of reversionary interest in the right to possess. If any portion of the original lease term is reserved by a tenant assignor, then the act is not an assignment, but instead is a sublease.
DISTINGUISHING ASSIGNMENTS & SUBLEASES: See if the tenant has any time left on the lease. If so, it’s a sublease; if not, it’s an assignment. Remember this by remembering that “sub” means “less,” so the sublessee gets less than the entire remainder of the lease.
NOTE: Say the tenant transfers away less than the entire premises (e.g., the upper floor of a house). This doesn’t affect the assignment v. sublease distinction; it’s the time remaining that’s determinative. Thus a transfer of the upper floor of a house for the entire remainder of the lease would be an assignment, but if it’s for less time, it’s a sublease.
COMPARE: A sublease, where the tenant transfers away less than the entire estate left to him, in terms of duration (e.g., transferring away the premises for two years under a lease that has three years remaining).
SIGNIFICANCE OF DISTINCTION: A sublessee is not liable for covenants running with the land; he can’t sue or be sued by the landlord. An assignee, on the other hand, is said to be in “privity of estate” with the landlord, and so he can sue the landlord or be sued by him.
In the oil and gas industry, you’ll see “assignments of the entire interest.” This usage can be misleading because many of these transactions are in fact are subleases not assignments. While the entire acreage of the lease is being conveyed, it is not being conveyed for the entire term of the lease which will revert to the original lessee at the end of the sublease. When the landlord sees the word “assignment,” in the title of the conveying instrument, he thinks his rights are protected and he’ll be able to sue the new tenant, but sometimes he is in for a nasty surprise. So is the original tenant who can be sued for the actions of his subtenant.
I’ve been asked to summarize this article and make it relevant to what landmen do, so here goes:
Just because you see a document that is titled “assignment,” that doesn’t mean it really is one. You have to look at the lease agreement and the “assignment” instrument to see if it’s really an assignment or not. If there was time left on the original lease after the assignment expires, it’s really a sublease. The title insurance company, bank or closing attorney may in some cases back away from the deal because of legal concerns, but in other cases this might not even matter. The landman can and should cover himself by requesting a stamp of approval from the attorney who represents his company or his client and work with the attorney to obtain any necessary paperwork like a release of claims or a quitclaim deed.