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Subleases – Part II

CO-Author:  Jon Goodman, Esq.

As businesses reduce staff or shut down locations, they often remain obligated on long term leases. Subleasing unused space helps offset continuing liability.

Subleases are often documented by simple forms specifying the premises, gross rental rate, security deposit and duration for the sublease, but then address other issues by incorporating the other terms of the prime lease into the sublease.

The subleasing of commercial space, however, is usually too complicated for such an abbreviated approach. Generic incorporation provisions often fail to adequately capture the parties’ intent. This is the second of a two-part article addressing the details that are often sloughed in subleasing.

Details Often Overlooked by Generic “Incorporation” Provision

The Subtenant should consider the surrender provisions of the Prime Lease. For example, does Subtenant intend to assume – as it might through a generic incorporation provision – an obligation to remove any previously installed fixtures or alterations and restore the Subleased Premises to some previous condition? Other obligations that Sublandlord might want to exclude from the incorporation concept are provisions for tenant improvement allowances, construction of tenant improvements by the Landlord, and rent concessions.

Parties should consider option provisions in a Prime Lease when using a generic incorporation provision. In our example, (where Original Tenant has the right to renew the Primary Lease), if Subtenant exercises its option to extend the Sublease for the remaining years of the initial term of the Prime Lease, would Subtenant have a further right to renew by virtue of the incorporation provision (incorporating Sublandlord’s renewal rights under the Prime Lease)? Questions like that should be resolved by specific provisions in the Sublease addressing Original Tenant/Sublandlord options. Sublandlord will often simply want to exclude any such options from incorporation into the Sublease.

If the Prime Lease gives Original Tenant specific rights outside the leased premises themselves, such as the right to use particular parking spaces or the right to use a particular portion of the roof for telecommunication or other facilities, the Sublease should include provisions allocating or expressly addressing the right of the Subtenant, if any, to those things. If the Prime Lease includes any Landlord obligations regarding such matters, such as obligations to enforce parking rights or restrictions, Sublandlord may want to consider excluding those obligations from the incorporation provision of the Sublease.

Sublandlord may want to provide that to take any action for which consent is required under the Prime Lease, Subtenant must obtain consent from both the Landlord and Sublandlord. Conversely, Subtenant may want to provide that for any such action, receipt of consent from the Landlord will suffice. Sublandlord will want Subtenant to pay not only any amounts charged by the Landlord in connection with such requests for consents, but Sublandlord’s costs as well (including attorney fees).

The stakeholders should address which party to the Sublease will have the right to decide whether to terminate the Prime Lease if allowed to do so by its terms (for example, because of a casualty or condemnation).

In a typical Sublease, Subtenant will be making rent payments to Sublandlord. Many sublease forms, however, overlook Subtenant’s need to include language obligating Sublandlord to pay all rent and other sums due under the Prime Lease. In addition, Subtenant should consider requiring an indemnification from Sublandlord for harm caused by Sublandlord’s breach of the Prime Lease. Many sublease forms include language providing for the automatic termination of the Sublease if the Prime Lease is terminated. Such provisions should be re-phrased to avoid relieving Sublandlord of liability to Subtenant for Sublandlord’s own failures and misconduct.

Sublease forms sometimes also include language calling for Subtenant to assume all obligations of Original Tenant under the Prime Lease. While Subtenant may be able to agree not to take any action that causes a breach of the Prime Lease, these assumption provisions are generally not appropriate and should be resisted by Subtenant.

Landlord Consent

The consent of the Landlord will be required for most subleases. The Landlord should be involved early in the subleasing discussions. In addition to a simple consent, however, there are other things a Subtenant should consider seeking from the Landlord, such as: a representation that the attached copy of the Prime Lease is a true and complete copy; a representation that the Prime Lease is in effect, that Sublandlord has paid all rent and other sums then due, and that the Landlord knows of no default by Sublandlord; an acknowledgment that the premises are in the condition required by the Prime Pease; a provision identifying what, if any, fixtures or tenant improvements must be removed at the end of the lease/Sublease; and consent for Subtenant to make any initial modifications Subtenant needs or intends to make to the Subleased Premises.

Subtenant would also like to see the Landlord agree: to not amend the Prime Lease without consent of Subtenant; to provide notice and an opportunity for Subtenant to cure any default by Sublandlord under the Prime Lease; and to treat the Sublease as a direct lease between the Landlord and Subtenant upon any termination of the Prime Lease. This last factor is especially important in a situation where Sublandlord’s financial situation is questionable.

Commercial subleases are relatively complicated – they should be tailored to the specific situation.

Click on the following link to read Part I of this article, Subleases-Part I.

A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.

For questions about this article please contact Jon Goodman.

David Farus is no longer with the law firm of Frascona, Joiner, Goodman and Greenstein, P.C.
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