A commercial real estate lease agreement is a lease between Landlord and Tenant. But Tenant might have too much space, and want to bring in an additional tenant to share the space, and the costs. Alternatively, the space might become too big or too small for Tenant, and it makes sense to have someone else take over the entire area. That’s a situation where you need a commercial sublease.
Landlord (lessor)- owner of the space
Tenant (lessee)- the renter of the space from the Landlord, may also be referred to as Prime Tenant
Subtenant (sublessee)- renter of the space from the Prime Tenant.
Lease- original agreement between Landlord and Tenant, may also be referred to as Master Lease
Sublease- agreement between Prime Tenant and Subtenant
The Master Lease will usually require Landlord’s consent to any Subtenant that Prime Tenant may propose. Negotiation tip: Don’t rely on Landlord’s absolute discretion as a consent standard. Landlord may also charge a fee to review Subtenant for consideration.
The consent should either be a neutral standard or it should state exactly what criteria Landlord will accept for a subtenant. Common factors include: the creditworthiness of the subtenant, if the use of the subtenant will compete with existing tenants or place an undue burden on the building (such as utilities or parking) and signage requirements.
Subleasing without Landlord’s consent, if it is required, can result in a whole host of financial and legal penalties.
Landlord may also require that Prime Tenant remain liable under the Prime Lease during the term of the commercial sublease. This basically means Prime Tenant is acting as a guarantor for Subtenant, so if rent isn’t paid in a timely fashion, or there is damage to the space, Landlord can look to Tenant for remedy, even if Subtenant is at fault.
The Master Lease agreement will control over the commercial sublease. Everyone still has to abide by the conditions of the Prime Lease. Subtenant should make sure it receives a copy of the Master Lease and any amendments or modifications. Some of the information may be confidential (maybe they don’t want to share the name of the Landlord or the primary rent amount), but it’s important to know what Subtenant is being legally bound to. If Prime Tenant won’t share a copy of the Prime Lease, that is a big warning sign.
Subtenant should be aware of Prime Tenant’s financial situation. If Subtenant pays rent to Prime Tenant, but Prime Tenant doesn’t send that payment to Landlord, there may be a lease default, and Prime Tenant and Subtenant could be terminated from the space. Negotiation tip: make sure that Landlord can require Subtenant to pay Landlord directly in the event that Prime Tenant defaults. That way, Subtenant has a better chance of staying in the space!
A commercial sublease can be a great arrangement if Tenant grows too big for the space or doesn’t need the entire space. A Subtenant can help offset Tenant’s costs, and Landlord can get paid in a timely fashion.
This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.