How Are Commercial Leases Divided When Partnerships End?

Introduction

When co-founders end an unregistered business partnership, the office lease is often one of the most difficult assets to address. The business may have closed, one founder may continue operating, or both parties may want to occupy the same premises. The result depends on the lease contract, the ownership of the leased property, the authority of the signatory, and the legal status of the partnership.

A partnership may exist even without registration when the parties agreed to contribute money, property, or industry to a common fund with the intention of dividing profits. However, the parties must distinguish the partnership’s rights under the lease from their individual rights as co-founders, employees, agents, or occupants.

What Happens to the Lease When the Partnership Ends?

The first question is whether the lease was executed in the partnership’s name or by one founder in an individual capacity. A partnership organized under the Civil Code has a juridical personality separate from that of its partners. It may acquire property, incur obligations, and sue or be sued in its own name under Articles 44 and 46 of the Civil Code of the Philippines, R.A. No. 386.

In Saludo, Jr. v. Philippine National Bank, G.R. No. 193138, 2018, the Supreme Court recognized that a partnership for the practice of law had a personality separate from its partners. Because the lease was entered into in the partnership’s name, the partnership was the real party in interest concerning rights and obligations under that lease.

Accordingly, the dissolution or cessation of the business does not automatically transfer the lease to either founder. The lease remains an asset or obligation of the partnership until it is terminated, assigned, surrendered, or dealt with during liquidation.

Who May Negotiate With the Landlord?

Landlord negotiations should ordinarily involve the partnership, acting through a person authorized under the partnership agreement or by the partners. If the partnership is already being dissolved, the partners should first agree who will handle the lease, inventory, deposits, improvements, and unpaid obligations.

The landlord is not required to recognize a private arrangement between co-founders if the lease names the partnership as lessee. A founder who negotiates alone may bind the partnership only if that person had actual authority, apparent authority recognized by the landlord, or authority arising from the ordinary management of the partnership’s affairs.

The parties should document the landlord’s position in writing, particularly if the proposed arrangement involves any of the following:

• termination and surrender of the existing lease;
• assignment of the lease to one founder or to a new entity;
• admission of a replacement tenant;
• continued joint occupation pending liquidation; or
• release of one or both founders from personal guarantees or unpaid rent.

Can One Founder Keep the Office Alone?

One founder cannot ordinarily appropriate the partnership’s lease merely because that founder signed the contract or paid some of the rent. If the lease was entered into for the partnership, the right to possess and use the premises belongs to the partnership, subject to the lease terms and the landlord’s rights.

A founder may continue using the office only with a valid agreement among the partners and, where required, the landlord’s written consent. The arrangement should state whether the continuing founder will pay rent directly, reimburse the partnership, assume utilities and repairs, and account for improvements or equipment left on the premises.

If the continuing founder operates a different business from the same location, the parties should obtain a formal assignment, novation, or new lease. A change in business name or registration does not by itself transfer the lessee’s contractual rights.

Can the Lease Be Divided Physically?

A commercial lease may be divided physically only if the lease and the premises permit separate occupation. The landlord’s written consent is generally necessary because partitioning the office may affect access, security, utilities, building rules, insurance, permitted use, and rent.

A private agreement between co-founders cannot compel the landlord to accept two separate tenants when the landlord contracted with only one lessee. The parties should therefore avoid treating a shared-office arrangement as a completed lease division unless the landlord has approved the arrangement.

The proposed document should identify the areas assigned to each occupant, the common areas, rent allocation, security deposit, maintenance responsibilities, compliance with building regulations, insurance, signage, and the consequences of default.

Assignment, Sublease, or New Lease?

The parties should identify the correct legal mechanism before implementing the transfer.

Arrangement	Effect	Landlord’s Role
Assignment	The existing lessee transfers its contractual rights and obligations to another person or entity.	Usually requires written consent when the lease contains a non-assignment clause or when the parties intend to release the original lessee.
Sublease	The original lessee remains bound to the landlord while allowing another occupant to use all or part of the premises.	Consent is required when the lease or applicable law requires it.
Novation	The original lease is replaced or modified so that a new lessee assumes the contractual position.	The landlord must ordinarily participate because the landlord’s rights and obligations are affected.
New lease	The old lease is terminated or surrendered and the landlord enters into a new agreement with one founder or a new entity.	The landlord may impose new rent, deposit, term, and documentary requirements.

For residential premises, Section 4 of Batas Pambansa Blg. 25 expressly prohibited subleasing or assignment without the written consent of the owner or lessor. That statute concerns dwelling units and should not be treated as the principal rule governing an ordinary commercial office lease. For commercial premises, the lease contract and the Civil Code provisions on contracts and lease ordinarily provide the starting point.

What If the Lease Was Signed by Only One Founder?

A lease signed by one founder may still bind the partnership if the founder acted as an authorized partner or agent and the transaction was within the partnership’s business purpose. The absence of the partnership’s registration does not automatically defeat the partnership’s existence or contractual rights.

Conversely, if the founder clearly contracted personally and did not represent the partnership, the landlord may treat that founder as the lessee. The parties should examine the lease’s recitals, signature block, tax identification details, invoices, payment records, correspondence, and the manner in which the premises were used.

In Mendiola v. Court of Appeals, G.R. No. 159333, 2006, the Supreme Court explained that an alleged partnership requires more than a reference to shared profits. The parties’ actual agreement and conduct must show the legal relationship they claim. This principle is relevant when one founder asserts that the lease belongs to the partnership while the other claims personal ownership of the tenancy.

What Rights Do Co-Founders Have During Dissolution?

Partnership assets and liabilities should be identified and settled before the remaining property is distributed to the partners. The lease may constitute a valuable business right, particularly when the premises are located in a favorable commercial area or contain substantial improvements paid for by the partnership.

The parties should account for:

• rent paid in advance;
• the security and utility deposits;
• unpaid rent and other charges;
• leasehold improvements;
• office furniture, equipment, and fixtures;
• renewal or purchase options; and
• liabilities arising from early termination or restoration of the premises.

A partner who continues using the premises may be required to account for the economic benefit received from exclusive occupation. The proper amount depends on the parties’ agreement, the lease terms, the partnership’s books, and the reasonable value of the use.

What If the Property Is Co-Owned by the Founders?

The analysis changes if the founders own the office property themselves rather than merely leasing it from a third-party landlord. Under Article 493 of the Civil Code of the Philippines, each co-owner has full ownership of his or her undivided share and may alienate, assign, or mortgage that share, subject to the rights of the other co-owners.

In Esteban, Jr., et al. v. Llaguno, G.R. No. 255001, 2023, the Supreme Court held that a co-owner may lease the entire co-owned property without the consent of the other co-owners, but the lease is effective only to the extent of the leasing co-owner’s ideal share. The non-consenting co-owners generally cannot eject the lessee while the co-ownership continues, although they are entitled to their proportionate share of the rentals.

The Court further explained that the co-owners may demand partition under Article 494 of the Civil Code. After partition, exclusive ownership and possession of the specific portions allotted to each co-owner may be enforced.

What Happens to the Lease After Partition?

Partition may determine which co-owner receives the portion occupied by the business, but it does not automatically erase contractual obligations. The parties must still consider the lease term, consent requirements, registration or annotation, improvements, and the rights of third parties.

If the lease was made by a co-owner without the consent of the others, the lease may continue only within the legal extent of that co-owner’s share. The tenant may not assume that the lease covers the exact physical area that will eventually be assigned to the signing co-owner.

For this reason, a long-term lease involving co-owned property should contain provisions addressing partition, sale, death, succession, dissolution of the co-ownership, and the effect of a change in ownership.

Can a Partner Eject the Other Occupant?

An ejectment case is not automatically available merely because the partnership has ended. The claimant must establish a superior right to physical possession and comply with the procedural requirements for unlawful detainer or forcible entry, including demand where required.

Where the premises remain partnership property or are held under a lease in the partnership’s name, one partner may lack the exclusive right to eject another partner or an occupant who possesses through the partnership. The dispute may instead require accounting, dissolution, liquidation, injunction, or partition.

The Supreme Court has likewise recognized that a co-tenant may not ordinarily maintain unlawful detainer against another co-tenant while the co-tenancy continues. In Lim, et al. v. Seng, G.R. No. 16318, 1921, the Court applied principles of estoppel and good faith where a party participated in creating lease rights and later attempted to defeat those rights after acquiring an interest in the property.

What About Renewal and Purchase Options?

A founder should not assume that a renewal or purchase option belongs personally to the founder who negotiated the original lease. If the lease was executed for the partnership, the option is generally connected with the partnership’s contractual rights unless the parties agreed otherwise and the landlord accepted the arrangement.

In F.F. Cruz & Company, Inc. v. NMC Container Lines, Inc., G.R. No. 270449, 2025, the Supreme Court emphasized that lease provisions must be read as a whole under Article 1374 of the Civil Code. The Court also addressed the requirement that an option to purchase be supported by consideration distinct from the purchase price. Whether an option carries over to a renewed or extended lease depends on the contract’s language and the parties’ intent.

Before negotiating a transfer, the parties should review whether the renewal or purchase provision is assignable, whether it requires separate consideration, and whether the landlord must approve its exercise by a new tenant.

Recommended Documents for a Clean Transfer

The appropriate documents depend on the agreed arrangement, but a well-documented transition commonly includes the following:

• a partnership dissolution or settlement agreement;
• a written landlord consent or no-objection letter;
• an assignment, sublease, or novation agreement;
• a turnover and inventory report;
• a written allocation of deposits, rent, utilities, and repairs;
• a release of guarantees, if agreed by the landlord; and
• a deed or agreement covering leasehold improvements and fixtures.

The documents should identify the effective date of the transfer, the person responsible for pre-transfer liabilities, the person responsible for future rent, the treatment of confidential records, and the procedure for resolving undisclosed charges.

Typical Scenarios

One founder continues the same business. The safest arrangement is for the partnership to surrender or assign the lease and for the continuing founder or a new corporation to execute a written lease with the landlord.

Both founders divide the office. The parties should obtain written landlord consent and sign a detailed space-sharing, sublease, or replacement lease agreement. The agreement should address access, common areas, rent, utilities, security, repairs, and termination.

The partnership closes immediately. The partners should formally surrender the premises, document the condition of the office, settle restoration costs, and obtain written confirmation of the return or application of the security deposit.

The landlord refuses the proposed transfer. The partners should examine the lease for assignment, sublease, change-of-control, and early-termination provisions. They should not transfer possession informally because unauthorized occupation may constitute a contractual violation.

Final Recommendations

Co-founders should treat the office lease as a partnership asset or liability until the parties establish otherwise. They should not rely on informal messages, verbal consent, or a change in business registration to transfer occupancy rights.

Before any founder takes exclusive possession, the parties should review the lease, verify the partnership’s authority structure, account for deposits and improvements, and obtain the landlord’s written approval where required. If the founders disagree, a written accounting and settlement process is preferable to unilateral lockout, transfer, or abandonment.

The legal result ultimately depends on the lease language, the parties’ authority, the partnership’s actual conduct, the ownership of the premises, and the landlord’s consent. A Philippine lawyer should review the documents before execution, particularly where the lease has a long remaining term, personal guarantees, substantial improvements, or a pending dispute.

About Nicolas and De Vega Law Offices

 Nicolas and de Vega Law Offices is a full-service law firm in the Philippines.  You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines.  You may also call us at +632 84706126, +632 84706130, +632 84016392 or e-mail us at [email protected]. Visit our website https://ndvlaw.com.