Subleasing: There's More To It Than You May Think
Clients or fellow attorneys from other practice areas often come to commercial real estate practitioners and request assistance with subleases. They invariably say, "Can you just look at this sublease quickly? Please don't spend a lot of time on it. It's just a sublease."
United States
Real Estate and Construction
Clients or fellow attorneys from other practice areas often come
to commercial real estate practitioners and request assistance with
subleases. They invariably say, "Can you just look at this
sublease quickly? Please don't spend a lot of time on it.
It's just a sublease."
Just a sublease. We try to break the news gently that adequate
legal advice on a sublease does not mean a "shorter" or
"less serious" review than the advice we might give on a
direct lease. In fact, adequate legal advice on a sublease -
whether on behalf of the proposed subtenant, prime tenant/sub
landlord or landlord - can often be more complex and require more
time than a lease review.
In the current market, space available for sublet is increasing
as sublessors (prime tenants) look to shed excess space, and some
businesses (potential subtenants) seek shorter terms and lower
rents in what they hope will be better space than what they could
afford a year ago. Below are a few of the many reasons why it pays
to have a complete professional review of a sublease.
1. The Prime
Lease
For a subtenant, the most important
legal service a lawyer can provide is review of not only the
sublease, but also of the prime lease between its immediate
landlord (prime tenant) and the landlord. A subtenant has no
contract with the landlord enabling the subtenant to occupy its
space. A subtenant's rights to the space are only as good as
its sub landlord's rights to that space.
Therefore, reading the sublease alone
is never adequate. The prime lease may contain time restrictions,
use restrictions, or form estoppels that are unworkable for the
subtenant, and let's not even mention the prime lease that
terminates by its terms if the space is sublet.
2. Landlord's Right to
Approve
Most leases require that a tenant
obtain written consent from its landlord before subleasing any
portion of the tenant's space. The landlord's review right
may be in its "sole and absolute discretion" (which
translates as "arbitrary" or "no reason"), or
"reasonable discretion" or "conditioned" upon
various specified conditions.
But no matter what, a landlord's
review takes time. For a subtenant, it is critical to know (1) how
much time a landlord has to review the proposed sublease (Fifteen
days? Thirty days? A reasonable period? Unspecified?); and (2)
whether there are specific materials the landlord will require to
complete its review, such as written materials demonstrating the
financial strength of the subtenant, a description of the
subtenant's proposed use, or a requirement that the initial
tenant remain liable on the lease, to name a few.
No subtenant wants to be surprised at
the end of a 30-day or 45-day waiting period with rejection by a
landlord well within its rights for a reason that was not specified
in the sublease, but rather plainly in the lease.
3. Financial Conditions of
the Sublessor
While a sublessor in financial
straits with too much space may be willing to offer bargain prices
on rental rates just to lower its losses, the subtenant should
carefully consider the sublessor's financial condition. In a
bankruptcy, a lease is an asset to the bankrupt estate. A bankrupt
sublessor will have two lease assets: one lease up stream to its
lessor, and one down stream to its sublessee. Both these leases are
subject to special treatment in the sublessor's
bankruptcy.
We have covered bankruptcy issues of
lessors and lessees in other McGuireWoods Washington Baltimore
Transactional Real Estate Group articles (
6/11/09
(http://www.mcguirewoods.com/news-resources/item.asp?item=4006) and
6/18/09)
(http://www.mcguirewoods.com/news-resources/item.asp?item=4057) but
it bears repeating that a bankrupt sublessor spells complications
for the landlord and the subtenant.
4. Three-way
Conversation
While it may appear that the landlord
can just approve or disapprove a sublease, the lease may contain a
pass-through for legal fees the landlord can charge for review of a
sublease. Some of these fees can be substantial, while others are
capped. Or it may be that the language of the lease is more
favorable to a sublease and prohibits an assignment of lease. Or
the sublease may specifically limit the actions or remedies of the
subtenant in the premises to what is permitted under the prime
lease, and the sublessor may not be able to compel the landlord to
cure its default under the sublease.
A performing subtenant without a
documented non-disturbance with the landlord (or its lender) may
find itself dispossessed of its space if the prime tenant defaults
on the lease (or the landlord on its loan). Any of these
circumstances could require the sublessor to intermediate between
its landlord and proposed subtenant during negotiation of the
sublease, conveying messages and positions of those parties as all
three parties negotiate to a conclusion.
Despite the pressure to create a simple and straightforward
sublease document quickly and cheaply, these are only a few of the
reasons why it is always wise to engage a knowledgeable commercial
leasing attorney to check the prime lease and tailor the sublease
to meet the specific needs of the parties.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.