Commercial sublease obligations can make or break your company financially. When subleasing a commercial space, the sublessee is motivated to reduce expenses, so the rent price can be attractive, but the sublessee will probably make some business concessions, including being bound by the original lease that may not have been negotiated properly or reviewed by an attorney. When negotiating a sublease, there are some important questions to ask. 

Q: Does the landlord need to consent to sublease?

A: The answer is almost always yes, but refer to the original lease agreement confirm.  Get the landlord’s consent in writing! 

Q: What is the landlord’s ability to terminate the lease or kick out the sublessor out of the space if the sublessee defaults?

A: It should be in the master lease, but a sublesse can modify these rights in the sublease, with everyone’s agreement. Negotiate so that the defaulting party is responsible for the costs and any damages incurred because of a default or eviction. 

Q: What is covered in the use clause

A: There may be restrictions on business terms, or what the space can be used for.  Make sure the landlord waives any of these restrictions that apply to sublessee’s business before signing the sublease!  Think about anything that is specific to your particular business, such as 24-hour access to and use of your space, parking access, delivery times and climate control.

Q: Why does the sublessor need to provide financials? 

A: When subleasing, the sublessee is essentially taking over the commercial real estate lease from the sublessor. The sublessor is usually required to prove to the landlord that the sublessee is a good business risk, because they are taking on the financial responsibility for the lease.  A traditional way to prove this is for the sublessee to provide financial information to the landlord to demonstrate that he or she can afford the rent.

Q: What about the section on attornment, right to cure and right to notice

A: Attornment means that if there is a new landlord, because the building ownership is transferred, then the sublessor and sublessee will agree to treat the new landlord like the old one, including paying rent. 

If the sublessor or sublessee does something wrong, whether it be monetary, such as not paying rent, or non-monetary, such as not fixing something, the right to cure comes into play. They defaulting party should receive legal notice about the issue and then be given a chance to fix the issue – the right to cure. 

How the landlord will tell the sublessee that something is wrong is typically described near the end of the lease. This is known as the right to notice.

The sublease might be a shorter document, but it’s important that it is drafted properly, or the sublessee might lose valuable legal rights upon signature. It doesn’t matter what’s fair, it matters what is in the lease. A smart sublessee will make sure that all of the documents that are needed (it might be more than one!) to make the sublease legal are reviewed by a knowledgeable commercial real estate attorney. Give me a call to set up an appointment today to discuss your sublease concerns!

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The transmission and receipt of information contained on this website does not constitute an attorney-client relationship. Persons should not act upon information found on this website without first seeking professional legal counsel.

Commercial Sublease

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.

Definitions

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

Landlord’s Consent

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.

Liability

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.


Disclaimer:

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.