Commercial Subleases - What You Need to Know
Sub-leasing is one alternative for commercial tenants to meet long-term lease obligations as they downsize or move. Typically, the landlord’s consent is required.
With a Sub-Lease, two separate contracts are being performed at the same time. The original lease, referred to here as the “Master Lease,” continues and the original Tenant remains liable to the original Landlord.
At the same time, the new Sub-Lease has turned the original tenant into the landlord of the new Sub-Tenant. In this arrangement, there is no contractual relationship between the original Landlord and the new Sub-Tenant.
This two-contract, three-party arrangement is subtle and complex. And full of pitfalls.
The typical Sub-Lease boilerplate provision will often say simply that the Sub-Lease “incorporates the terms of the Master Lease into the Sub-Lease as if fully set forth herein.”
This incorporation of the Master Lease into the Sub-Lease is woefully insufficient and likely fails to express the parties’ intentions and expectations. This boilerplate certainly does not answer these types of questions:
Are there certain Master Lease obligations for which the Sub-Tenant should not be liable?
What happens if the Landlord fails to perform?
What happens if the Sub-Tenant or Landlord defaults?
Importantly, absent an agreement between them, the Landlord is not directly answerable to the Sub-Tenant. Rather, the Tenant is liable to the Sub-Tenant for the Landlord’s performance.
For example, what happens if the Landlord fails to perform the following types of obligations:
Maintain the premises
Estimate and reconcile NNN expenses
Comply with exclusive use covenants
Maintain insurance coverage
Enforce rules and regulations
One way to address these questions is for the Sub-Tenant to negotiate for Sub-Lease language granting the right to seek remedies against the Landlord under the Master Lease as the Tenant’s agent.
Some other questions and considerations in a Sub-Lease include:
Can the Sub-Tenant audit the Landlord’s common area maintenance expenses?
Can the Sub-Tenant appeal property tax assessments?
If the Landlord’s consent is required, then is the tenant’s consent also required?
Is consent by both the Tenant and Sub-Tenant required to amend or terminate the Master Lease?
If the Master Lease is terminated because of the Tenant’s breach, is the Sub-Lease also terminated, or can the Sub-Tenant continue under the Sub-Lease?
Who owns the Tenant and Sub-Tenant improvements?
Where are Sub-Lease payments made? Is the Tenant required to pay rent received from the Sub-Tenant over to the Landlord?
What security deposits have been made and with whom?
Who benefits from Tenant improvement credits or rent credits?
Can the Sub-Tenant exercise options to extend or renew? Will the Tenant remain liable on the lease throughout the option renewal term or only through the end of the existing term?
Can the Sub-Tenant assign or sub-lease?
Can the Sub-Tenant exercise a right of first refusal?
If the Sub-Tenant is in default, must the Landlord notify the Tenant?
It is in everyone’s interest to address, negotiate, and document these commercial Sub-Lease terms. That way, everyone has a clear roadmap for their new relationship and there will be fewer surprises ahead.
This article does not constitute legal advice. Please consult an attorney to apply these concepts to your specific commercial Sub-Lease transaction.
Diane Wolfson is the managing partner of Sphere Law Firm. She specializes in real estate, business and commercial litigation.