Important Issues to Consider Before Entering into a Commercial Sublease

Specifically Provide How Rent Will Be DeterminedA properly structured sublease can be a prudent strategy in a commercial lease transaction. However, if poorly drafted, a sublease can unnecessarily expose all three parties (the landlord, tenant and subtenant) to unforeseen liabilities and risks.

Before entering into a sublease, the parties should carefully review the master lease agreement to determine (among other things):

  1. Whether the prior consent of the landlord is required;
  2. If the subtenant’s proposed use of the space is a permitted use under the master lease;
  3. If any additions or improvements to the space made by the subtenant become the property of the landlord upon termination or expiration of the sublease;
  4. Whether all terms and conditions of the master lease are automatically incorporated into the sublease; and
  5. If the master lease requires the payment to the landlord of a fee (often between $1,000 and $2000) to reimburse the landlord for its legal and accounting fees incurred in its review of a sublease request.

A typical commercial lease will either provide the landlord with the right to withhold its consent to a sublease in its sole discretion, or will more commonly provide that the landlord may not unreasonably withhold its consent.  While such a “reasonableness” standard is admittedly vague, it is fact specific analysis which commonly takes into account a number of factors, including the financial strength, experience and reputation of the proposed subtenant, whether the tenant is otherwise in good standing under the master lease, and whether the subtenant’s proposed use is both permitted under the master lease and a good fit for the building’s tenant mix.

As the subtenant does not have “privity of contract” with the landlord, the continued validity of the sublease is often expressly tied to the existence of the master lease (i.e., if the master lease terminates, so does the sublease).

A savvy subtenant could request that the landlord agree in its consent to:

  1. Allow the subtenant to remain in possession if the master lease is terminated due to a tenant default;
  2. Require the landlord to provide the subtenant with copies of any default notices sent to the tenant and give the subtenant the right (but not the obligation) to cure the tenant’s default; and/or,
  3. Prohibit the landlord and tenant from materially amending the master lease without the subtenant’s prior consent.

The tenant and proposed subtenant should also review the master lease to determine whether the landlord has the right to “recapture” the leased space rather than reject or approve the proposed sublease, and to also confirm whether the landlord has the right to collect from the tenant any funds received from the subtenant over and above the amount the tenant is required to pay under the master lease.

The items discussed above are but a few of the many complex issues to be addressed when negotiating a commercial sublease agreement.  If you have questions regarding commercial lease or sublease matters, please contact Joshua Pope or another attorney in MPBA’s Real Estate Department.