Subleasing Pointers: The Perspective of a Prime Landlord, Sublandlord, and Subtenant

Non-Disturbance

One of the most highly contested discussions regarding a sublease between a Subtenant and Prime Landlord involves the decision as to whether the Prime Landlord will grant the Subtenant 'non-disturbance' (i.e., recognize the Subtenant and the Sublease) following a default of the Sublandlord (aka original Tenant) and termination of the Prime Lease. If the Sublease is for any portion less than the entire leased premises, there is little incentive for a Prime Landlord to grant non-disturbance rights to a Subtenant. When discussing this concession with a Subtenant, consider the location and layout for the leased premises and the subleased premises. The Prime Landlord's agreement to recognize the Subtenant, pursuant to the terms of the Sublease, could interfere with the Prime Landlord's efforts to relet the remainder of the original premises; the leased premises may be more marketable as a larger vacant space. Further, consider the rental rates paid by the Subtenant pursuant to the Sublease, and whether such rates could reasonably become 'below market' rates in the future, at the time of the default. The one time when a Sublandlord might want to provide a Subtenant non-disturbance protection is when the Subtenant is a major direct tenant of the Sublandlord for other significant space in the building.

While Prime Landlords may be hesitant to grant automatic non-disturbance rights to a Subtenant, Prime Landlords should always reserve the option to recognize the Subtenant and the Sublease following a Sublandlord's default under the Prime Lease. This option to 'go direct' with a Subtenant permits the Prime Landlord the option to retain at least a portion of the income stream associated with the Prime Lease in mitigation of its damages following a default situation under the Prime Lease.

Sample Clause:

Unless Prime Landlord elects otherwise, if for any reason the Lease or the Sublandlord's rights to occupy or possess the Leased Premises are terminated, the Sublease shall also be terminated and Subtenant shall have no right, title, or interest in and to the Subleased Premises, through the Sublease or otherwise, and, accordingly, it shall vacate the Subleased Premises upon request of the Prime Landlord. Notwith- standing the foregoing, Prime Landlord shall have the right, in its sole, arbitrary discretion, to elect to have the Sublease survive the termination of the Prime Lease or termination of Sublandlord's rights to occupy and possess the Leased Premises, in which case Subtenant will be obligated to attorn to Prime Landlord and continue to perform its obligations under the Sublease as if the Prime Lease or Sublandlord's rights to occupy and possess the Leased Premises had not been terminated and the Sublease were a direct lease between Prime Landlord and Subtenant.

Extension of 'Personal' Rights

When considering a potential Sublease request, confirm whether the Prime Lease contains any rights held by the Sublandlord that would not be appropriate for the Subtenant to exercise. Examples of such common provisions to be analyzed are signage rights, additional parking allowances, right of offers or refusals, renewal options, and early termination options. These categories of provisions all may have been specifically negotiated with the Sublandlord in mind, and the Prime Landlord may have never agreed to such a provision with another party. Further, it may be in the Subtenant's best interest to negotiate directly with the Prime Landlord for a new, direct lease agreement.

The Prime Landlord may protect these 'personal' rights in the Prime Lease by including language that such rights are personal and do not extend to any assignees or subtenants or, in certain situations, such rights may terminate upon any assignment of the Prime Lease or sublease of the leased premises. The Prime Landlord may also make such distinction in the consent document the Prime Landlord provides to the Subtenant and Sublandlord for the Sublease generically by stating, for example, that 'no expansion or extension rights provided in the Prime Lease' shall apply for the benefit of the Subtenant. The Prime Landlord also may specifically list those provisions in the Prime Lease, section by section, which shall not be incorporated into the Sublease Agreement.

Protection of Exclusives

If the Prime Landlord has granted any other tenants exclusive use rights with respect to other space within the building, the Prime Landlord should take steps to ensure that the Subtenant does not violate these exclusives as well. Consider the 'permitted use' clause under the Prime Lease. While the Subtenant's proposed use of the subleased premises may be permitted under the express terms of the Prime Lease, will this new use in turn violate any exclusives the Prime Landlord had granted prior to, or even after, execution of the Prime Lease?

Consent to Further Subleases or Assignments

The Prime Landlord's consent to any sublease should specifically state that such consent does not waive the Prime Landlord's rights under the Prime Lease with respect to further assignments or subleases.

Sample Clause:

This Consent shall not be construed as permitting any further subletting of the Leased Premises or assignment of the Prime Lease except in strict accordance with the terms of the Prime Lease. Neither Subtenant nor Subtenant's legal representatives or successors in interest by operation of law or otherwise shall assign, mortgage, or otherwise encumber the Sublease or enter into a sublease or license agreement for any portion of the Subleased Premises or permit all or any portion of the Subleased Premises to be used by others.

Reimbursement of Fees

While the Prime Lease may provide for reimbursement of fees incurred in connection with review of a proposed Sublease or assignment of the Prime Lease, the parties often negotiate a cap on such fees in the negotiation of the Prime Lease. It is not uncommon to see these fees capped at $500 or $1,000 for each instance. Be careful when agreeing to a cap on fees, particularly in a Prime Lease with greater square footage (and therefore, more opportunities to sublease). Subleases, and the consent documents Prime Landlords enter into, may be negotiated just as zealously as the Prime Lease itself. Consider whether a cap on fees should apply only if the parties agree to use the Prime Landlord's reasonable 'form' of consent document, and otherwise, the Prime Landlord shall be entitled to recover its actual fees incurred.

Part Two of this article will discuss subleasing from the Sublandlord's perspective.

Alison Jones is a senior associate in the Atlanta office of Alston & Bird LLP, focusing on the representation of institutional pension funds, life insurance companies, and other equity investment clients engaged in acquisitions, sales, and commercial office leasing. Randy Luffman and Natosha O. Reid are associates in the same office. Luffman represents national pension fund advisers in the leasing, acquisition, and disposition of commercial properties and represents developers and institutional users of retail and commercial properties. Reid's practice focuses on commercial real estate development, acquisitions, dispositions, and leasing. She represents clients in office, retail, multifamily, senior housing, industrial, and affordable housing property transactions. The authors may be contacted by phone at 404-881-7000 or via e-mail at [email protected]; [email protected]; and [email protected].

Part One of a Three-Part Series

Subleasing has become so common in commercial leasing today that space users, brokers, and attorneys need to be aware of the many issues that arise in these transactions. The Prime Landlord is faced with a new occupant in its building that it may or may not have contemplated. The Sublandlord needs to minimize the exposure that may come with new responsibilities of being a landlord. The Subtenant may find itself in the awkward position of looking to the Prime Landlord for the provision of services, without the comfort of privity of contract to enforce the Prime Landlord's obligations. Nonetheless, over the years, Prime Landlords, Sublandlords, and Subtenants have negotiated their way around these potential pitfalls. This three-part article provides a few pointers for the Prime Landlord, Sublandlord, and Subtenant to consider when negotiating provisions relating to subleasing.

Prime Landlord

Non-Disturbance

One of the most highly contested discussions regarding a sublease between a Subtenant and Prime Landlord involves the decision as to whether the Prime Landlord will grant the Subtenant 'non-disturbance' (i.e., recognize the Subtenant and the Sublease) following a default of the Sublandlord (aka original Tenant) and termination of the Prime Lease. If the Sublease is for any portion less than the entire leased premises, there is little incentive for a Prime Landlord to grant non-disturbance rights to a Subtenant. When discussing this concession with a Subtenant, consider the location and layout for the leased premises and the subleased premises. The Prime Landlord's agreement to recognize the Subtenant, pursuant to the terms of the Sublease, could interfere with the Prime Landlord's efforts to relet the remainder of the original premises; the leased premises may be more marketable as a larger vacant space. Further, consider the rental rates paid by the Subtenant pursuant to the Sublease, and whether such rates could reasonably become 'below market' rates in the future, at the time of the default. The one time when a Sublandlord might want to provide a Subtenant non-disturbance protection is when the Subtenant is a major direct tenant of the Sublandlord for other significant space in the building.

While Prime Landlords may be hesitant to grant automatic non-disturbance rights to a Subtenant, Prime Landlords should always reserve the option to recognize the Subtenant and the Sublease following a Sublandlord's default under the Prime Lease. This option to 'go direct' with a Subtenant permits the Prime Landlord the option to retain at least a portion of the income stream associated with the Prime Lease in mitigation of its damages following a default situation under the Prime Lease.

Sample Clause:

Unless Prime Landlord elects otherwise, if for any reason the Lease or the Sublandlord's rights to occupy or possess the Leased Premises are terminated, the Sublease shall also be terminated and Subtenant shall have no right, title, or interest in and to the Subleased Premises, through the Sublease or otherwise, and, accordingly, it shall vacate the Subleased Premises upon request of the Prime Landlord. Notwith- standing the foregoing, Prime Landlord shall have the right, in its sole, arbitrary discretion, to elect to have the Sublease survive the termination of the Prime Lease or termination of Sublandlord's rights to occupy and possess the Leased Premises, in which case Subtenant will be obligated to attorn to Prime Landlord and continue to perform its obligations under the Sublease as if the Prime Lease or Sublandlord's rights to occupy and possess the Leased Premises had not been terminated and the Sublease were a direct lease between Prime Landlord and Subtenant.

Extension of 'Personal' Rights

When considering a potential Sublease request, confirm whether the Prime Lease contains any rights held by the Sublandlord that would not be appropriate for the Subtenant to exercise. Examples of such common provisions to be analyzed are signage rights, additional parking allowances, right of offers or refusals, renewal options, and early termination options. These categories of provisions all may have been specifically negotiated with the Sublandlord in mind, and the Prime Landlord may have never agreed to such a provision with another party. Further, it may be in the Subtenant's best interest to negotiate directly with the Prime Landlord for a new, direct lease agreement.

The Prime Landlord may protect these 'personal' rights in the Prime Lease by including language that such rights are personal and do not extend to any assignees or subtenants or, in certain situations, such rights may terminate upon any assignment of the Prime Lease or sublease of the leased premises. The Prime Landlord may also make such distinction in the consent document the Prime Landlord provides to the Subtenant and Sublandlord for the Sublease generically by stating, for example, that 'no expansion or extension rights provided in the Prime Lease' shall apply for the benefit of the Subtenant. The Prime Landlord also may specifically list those provisions in the Prime Lease, section by section, which shall not be incorporated into the Sublease Agreement.

Protection of Exclusives

If the Prime Landlord has granted any other tenants exclusive use rights with respect to other space within the building, the Prime Landlord should take steps to ensure that the Subtenant does not violate these exclusives as well. Consider the 'permitted use' clause under the Prime Lease. While the Subtenant's proposed use of the subleased premises may be permitted under the express terms of the Prime Lease, will this new use in turn violate any exclusives the Prime Landlord had granted prior to, or even after, execution of the Prime Lease?

Consent to Further Subleases or Assignments

The Prime Landlord's consent to any sublease should specifically state that such consent does not waive the Prime Landlord's rights under the Prime Lease with respect to further assignments or subleases.

Sample Clause:

This Consent shall not be construed as permitting any further subletting of the Leased Premises or assignment of the Prime Lease except in strict accordance with the terms of the Prime Lease. Neither Subtenant nor Subtenant's legal representatives or successors in interest by operation of law or otherwise shall assign, mortgage, or otherwise encumber the Sublease or enter into a sublease or license agreement for any portion of the Subleased Premises or permit all or any portion of the Subleased Premises to be used by others.

Reimbursement of Fees

While the Prime Lease may provide for reimbursement of fees incurred in connection with review of a proposed Sublease or assignment of the Prime Lease, the parties often negotiate a cap on such fees in the negotiation of the Prime Lease. It is not uncommon to see these fees capped at $500 or $1,000 for each instance. Be careful when agreeing to a cap on fees, particularly in a Prime Lease with greater square footage (and therefore, more opportunities to sublease). Subleases, and the consent documents Prime Landlords enter into, may be negotiated just as zealously as the Prime Lease itself. Consider whether a cap on fees should apply only if the parties agree to use the Prime Landlord's reasonable 'form' of consent document, and otherwise, the Prime Landlord shall be entitled to recover its actual fees incurred.

Part Two of this article will discuss subleasing from the Sublandlord's perspective.

Alison Jones is a senior associate in the Atlanta office of Alston & Bird LLP, focusing on the representation of institutional pension funds, life insurance companies, and other equity investment clients engaged in acquisitions, sales, and commercial office leasing. Randy Luffman and Natosha O. Reid are associates in the same office. Luffman represents national pension fund advisers in the leasing, acquisition, and disposition of commercial properties and represents developers and institutional users of retail and commercial properties. Reid's practice focuses on commercial real estate development, acquisitions, dispositions, and leasing. She represents clients in office, retail, multifamily, senior housing, industrial, and affordable housing property transactions. The authors may be contacted by phone at 404-881-7000 or via e-mail at [email protected]; [email protected]; and [email protected].