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

Prime Lease: Incorporate Only Terms You Want

Sublandlord has taken possession of the premises under the terms of the Prime Lease, so Sublandlord wants to take care not to grant Subtenant more possessory rights than are granted Sublandlord under the Prime Lease. Sublandlord will likely want to pass most of the terms of the Prime Lease on to its Subtenant; however, just as Prime Landlord may not desire that certain 'personal rights' be granted to Subtenant, Sublandlord may desire to exclude from a Sublease certain rights granted it under the Prime Lease. For example, a Sublandlord may have taken possession of 20,000 square feet of office space in an office building, with an option to expand into any adjacent space as it becomes available. If the Sublease covers only 10,000 square feet of the demised premises under the Prime Lease, and Sublandlord wants to retain for itself all expansion rights, then such expansion right provision should be excluded from the terms passed through to Subtenant. Likewise, if under the Prime Lease, Sublandlord is granted 10 reserved parking spaces, Sublandlord may desire to exclude such spaces from the terms of the Sublease. Further examples would include extension options, rights of first offer to purchase, and signage rights.

Example:

This Sublease and all of Subtenant's rights hereunder are expressly subject to and subordinate to all of the terms of the Lease. Subtenant hereby acknowledges that it has received copies of the Lease and has read all of the terms and conditions thereof. Subtenant hereby agrees to assume all obligations of 'Tenant' with respect to the Subleased Premises. All of the terms and conditions of the Lease, except for Section [insert sections Sublandlord desires to exclude] of the Lease, are hereby incorporated into this Sublease by reference as if fully set forth herein and except that 'Landlord' shall be read as 'Sublandlord' and 'Tenant' shall be read as 'Subtenant'; provided, however, that Subtenant hereby acknowledges that Subtenant shall look solely to Landlord for the performance of all the Landlord's obligations under the Lease and that Sublandlord shall not be obligated to provide any services to Subtenant or otherwise perform any obligations in connection with this Sublease.

By incorporating the terms of the Prime Lease into the Sublease by reference, you can further provide that any actions by Subtenant that would cause a default under the Prime Lease will be an event of default under the Sublease. Notice and cure periods should be shortened under the Sublease in order to provide a cushion between Subtenant's notice and cure periods, and Sublandlord's obligation to Prime Landlord.

Example:

Any act or omission by Subtenant that would constitute a default under the Lease shall, subject to the same notice and cure provisions provided in the Lease, be deemed a default by Subtenant under this Sublease; provided, however, that the notice and cure periods provided in the Lease for any monetary defaults shall be deemed to be three (3) business days less for the purposes of this Sublease, and the notice and cure periods provided in the Lease for any non-monetary defaults shall be deemed to be five (5) business days less for the purposes of this Sublease.

True-Up Provisions

Although the terms and provisions of the Prime Lease are incorporated by reference, those starting with 'form' Subleases will likely have provisions regarding repairs, maintenance, insurance, casualty, and condemnation that will need to be reviewed and revised to be consistent with, or at least as onerous as, the Prime Lease in order to minimize Sublandlord's obligations under the Sublease. The repairs and maintenance sections of the Sublease should be compared with those of the Prime Lease for consistency so that Sublandlord is not left with an obligation to maintain any portion of the sublet premises, unless specifically negotiated between Sublandlord and Subtenant. Likewise, conform the insurance provisions of the Sublease to those in the Prime Lease to ensure that Sublandlord is not left to provide additional coverage on the premises to bring it up to the Prime Lease requirements.

Unless the Sublease automatically terminates in the event of a casualty or condemnation under the Prime Lease, in conforming the terms of the Sublease to the Prime Lease, be certain to allow an additional time buffer between Subtenant's response to Sublandlord and Sublandlord's response to prime Landlord. As noted in the sample language above for notice and cure periods, require that the Subtenant respond to Sublandlord an adequate number of business days prior to Sublandlord's obligation to respond to Prime Landlord, so that Sublandlord can timely meet its obligations under the Sublease. When addressing the casualty provision, provide that Subtenant must look solely to Prime Landlord and not Sublandlord to perform any rebuilding obligations. Sample casualty and condemnation language follows:

Sublandlord shall have no obligation to repair or rebuild the Sublet Premises in the event that the same are damaged or destroyed by reason of fire, or other casualty, and Subtenant and Sublandlord shall look to Prime Landlord for any repair or rebuilding of the Sublet Premises as may be provided for in the Prime Lease. If all or any portion of the Sublet Premises are damaged (or partially damaged) by fire or other casualty, or taken by condemnation (or similar proceeding or sale in lieu thereof), Subtenant shall have, with respect to Rent hereunder, the same Rent abatement rights as Sublandlord may have in the Prime Lease with respect to the Sublet Premises, upon such terms and conditions as are specified therein. If the Prime Lease is terminated, this Sublease shall also terminate and Sublandlord and Subtenant shall be relieved of all obligations hereunder arising on and after the date of such termination. Nothing contained herein shall interfere with Sublandlord's right to terminate the Prime Lease in the event of casualty or condemnation (or similar proceeding or sale in lieu thereof).

Termination of Prime Lease

The bargaining power of the respective parties in a Sublease negotiation can have a great deal of effect on the end product. This can be seen in the variety of ways a termination of the Prime Lease is dealt with in various Sublease documents. Ideally, the Sublandlord would like to be insulated from any liability with respect to a Prime Lease termination under a provision such as, 'Subtenant acknowledges that any termination of the Prime Lease is a termination of the Sublease,' without mention of liability or default. This allows Sublandlord maximum flexibility with respect to the exercise of any rights to terminate the Prime Lease without any exposure under the Sublease. As a move to middle ground, the Sublandlord may offer the following as a compromise:

In the event of the termination of the Prime Lease for any reason, then this Sublease shall terminate coincidentally therewith, and Sublandlord shall not be liable on account thereof or in connection therewith so long as such termination is not as a result of Sublandlord's default under the Prime Lease.

This provision provides that absent a default on the part of Sublandlord, Sublandlord will not be liable for any termination of the Prime Lease. This provision may allow Sublandlord the opportunity to exercise its termination rights under the Prime Lease without resulting liability to Subtenant under the Sublease.

In the event the Subtenant has a much stronger bargaining position, it may insist upon an affirmative obligation of Sublandlord to keep the Prime Lease in effect. Such a provision would require that Sublandlord refrain from exercising any termination rights under the Prime Lease absent an expiration or earlier termination of the Sublease. In any event, Sublandlord should offset this obligation with the requirement that Subtenant remain in good standing under the Sublease:

Provided Subtenant is not in default in connection with any of the material terms and conditions of Subtenant to be performed hereunder beyond any applicable cure period, Sublandlord agrees to keep the Prime Lease in full force and effect without default or amendment.

The Privity Issue

In several of the sample provisions noted in this article, the Subtenant is taking on the responsibility of looking solely to the Prime Landlord for obligations such as maintenance, repairs, and restoration of the property in the event of a condemnation. When presented with these provisions, and absent a joinder to the Sublease by Prime Landlord, the Subtenant will often respond that it has no privity with the Prime Landlord, and is in no position to make the Prime Landlord perform. From a Sublandlord's perspective, the Sublandlord does not want to be in a position of being in default under the Sublease for failure of the Prime Landlord to perform under the Prime Lease. A suggested resolution to this issue is to add a provision that requires Sublandlord to use commercially reasonable efforts to enforce its rights under the Sublease, but without any obligation on the part of the Sublandlord to bring suit against the Prime Landlord. Sublandlord may also assign its right to sue under the Prime Lease to Subtenant.

Example:

If Prime Landlord shall be in default of any of its obligations under the Prime Lease with respect to the Sublet Premises, Subtenant shall be entitled to all rights and remedies against Prime Landlord which Sublandlord would otherwise be entitled to under the Prime Lease as a result of such default, subject, however, to the following provisions and procedures: insofar as Prime Landlord is or may be obligated to furnish any services to the Sublet Premises, to repair or rebuild the same, to perform any other act whatsoever with respect to the Sublet Premises or to perform any obligation or satisfy any condition under the Prime Lease, Subtenant expressly acknowledges that Sublandlord does not undertake the performance or observance of such obligations, but is only obligated to use reasonable efforts to obtain Prime Landlord's performance for Subtenant's benefit and without obligating itself to institute legal action or incur any expense. Upon Subtenant's request, Sublandlord shall in good faith attempt to obtain Prime Landlord's performance for Subtenant's benefit and in connection therewith, shall participate in discussions and meetings with Prime Landlord, write letters to Prime Landlord and take other reasonable action. If after receipt of written request from Subtenant, Sublandlord fails or refuses to take appropriate action for the enforcement of Sublandlord's rights against Prime Landlord with respect to the Sublet Premises, Subtenant shall have the right to take such action in Subtenant's own name, but only for that purpose and only to such extent, and Subtenant shall be subrogated to Sublandlord's rights under the Prime Lease to the extent that the same shall apply to the Sublet Premises and Sublandlord will cooperate fully with Subtenant (including signing any pleadings) in such enforcement efforts so long as Sublandlord does not incur any costs in so doing.

Part Three of this article will present the Subtenant'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 is an associate in the firm's Atlanta office. He 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. Natosha O. Reid is an associate in the firm's Atlanta office. Her practice focuses on commercial real estate development, acquisitions, dispositions, and leasing.

Part Two of a Three-Part Series

Part One of this series discussed subleasing from the perspective of the Prime Landlord. This second installment addresses the issue from the Sublandlord's perspective.

Sublandlord

Prime Lease: Incorporate Only Terms You Want

Sublandlord has taken possession of the premises under the terms of the Prime Lease, so Sublandlord wants to take care not to grant Subtenant more possessory rights than are granted Sublandlord under the Prime Lease. Sublandlord will likely want to pass most of the terms of the Prime Lease on to its Subtenant; however, just as Prime Landlord may not desire that certain 'personal rights' be granted to Subtenant, Sublandlord may desire to exclude from a Sublease certain rights granted it under the Prime Lease. For example, a Sublandlord may have taken possession of 20,000 square feet of office space in an office building, with an option to expand into any adjacent space as it becomes available. If the Sublease covers only 10,000 square feet of the demised premises under the Prime Lease, and Sublandlord wants to retain for itself all expansion rights, then such expansion right provision should be excluded from the terms passed through to Subtenant. Likewise, if under the Prime Lease, Sublandlord is granted 10 reserved parking spaces, Sublandlord may desire to exclude such spaces from the terms of the Sublease. Further examples would include extension options, rights of first offer to purchase, and signage rights.

Example:

This Sublease and all of Subtenant's rights hereunder are expressly subject to and subordinate to all of the terms of the Lease. Subtenant hereby acknowledges that it has received copies of the Lease and has read all of the terms and conditions thereof. Subtenant hereby agrees to assume all obligations of 'Tenant' with respect to the Subleased Premises. All of the terms and conditions of the Lease, except for Section [insert sections Sublandlord desires to exclude] of the Lease, are hereby incorporated into this Sublease by reference as if fully set forth herein and except that 'Landlord' shall be read as 'Sublandlord' and 'Tenant' shall be read as 'Subtenant'; provided, however, that Subtenant hereby acknowledges that Subtenant shall look solely to Landlord for the performance of all the Landlord's obligations under the Lease and that Sublandlord shall not be obligated to provide any services to Subtenant or otherwise perform any obligations in connection with this Sublease.

By incorporating the terms of the Prime Lease into the Sublease by reference, you can further provide that any actions by Subtenant that would cause a default under the Prime Lease will be an event of default under the Sublease. Notice and cure periods should be shortened under the Sublease in order to provide a cushion between Subtenant's notice and cure periods, and Sublandlord's obligation to Prime Landlord.

Example:

Any act or omission by Subtenant that would constitute a default under the Lease shall, subject to the same notice and cure provisions provided in the Lease, be deemed a default by Subtenant under this Sublease; provided, however, that the notice and cure periods provided in the Lease for any monetary defaults shall be deemed to be three (3) business days less for the purposes of this Sublease, and the notice and cure periods provided in the Lease for any non-monetary defaults shall be deemed to be five (5) business days less for the purposes of this Sublease.

True-Up Provisions

Although the terms and provisions of the Prime Lease are incorporated by reference, those starting with 'form' Subleases will likely have provisions regarding repairs, maintenance, insurance, casualty, and condemnation that will need to be reviewed and revised to be consistent with, or at least as onerous as, the Prime Lease in order to minimize Sublandlord's obligations under the Sublease. The repairs and maintenance sections of the Sublease should be compared with those of the Prime Lease for consistency so that Sublandlord is not left with an obligation to maintain any portion of the sublet premises, unless specifically negotiated between Sublandlord and Subtenant. Likewise, conform the insurance provisions of the Sublease to those in the Prime Lease to ensure that Sublandlord is not left to provide additional coverage on the premises to bring it up to the Prime Lease requirements.

Unless the Sublease automatically terminates in the event of a casualty or condemnation under the Prime Lease, in conforming the terms of the Sublease to the Prime Lease, be certain to allow an additional time buffer between Subtenant's response to Sublandlord and Sublandlord's response to prime Landlord. As noted in the sample language above for notice and cure periods, require that the Subtenant respond to Sublandlord an adequate number of business days prior to Sublandlord's obligation to respond to Prime Landlord, so that Sublandlord can timely meet its obligations under the Sublease. When addressing the casualty provision, provide that Subtenant must look solely to Prime Landlord and not Sublandlord to perform any rebuilding obligations. Sample casualty and condemnation language follows:

Sublandlord shall have no obligation to repair or rebuild the Sublet Premises in the event that the same are damaged or destroyed by reason of fire, or other casualty, and Subtenant and Sublandlord shall look to Prime Landlord for any repair or rebuilding of the Sublet Premises as may be provided for in the Prime Lease. If all or any portion of the Sublet Premises are damaged (or partially damaged) by fire or other casualty, or taken by condemnation (or similar proceeding or sale in lieu thereof), Subtenant shall have, with respect to Rent hereunder, the same Rent abatement rights as Sublandlord may have in the Prime Lease with respect to the Sublet Premises, upon such terms and conditions as are specified therein. If the Prime Lease is terminated, this Sublease shall also terminate and Sublandlord and Subtenant shall be relieved of all obligations hereunder arising on and after the date of such termination. Nothing contained herein shall interfere with Sublandlord's right to terminate the Prime Lease in the event of casualty or condemnation (or similar proceeding or sale in lieu thereof).

Termination of Prime Lease

The bargaining power of the respective parties in a Sublease negotiation can have a great deal of effect on the end product. This can be seen in the variety of ways a termination of the Prime Lease is dealt with in various Sublease documents. Ideally, the Sublandlord would like to be insulated from any liability with respect to a Prime Lease termination under a provision such as, 'Subtenant acknowledges that any termination of the Prime Lease is a termination of the Sublease,' without mention of liability or default. This allows Sublandlord maximum flexibility with respect to the exercise of any rights to terminate the Prime Lease without any exposure under the Sublease. As a move to middle ground, the Sublandlord may offer the following as a compromise:

In the event of the termination of the Prime Lease for any reason, then this Sublease shall terminate coincidentally therewith, and Sublandlord shall not be liable on account thereof or in connection therewith so long as such termination is not as a result of Sublandlord's default under the Prime Lease.

This provision provides that absent a default on the part of Sublandlord, Sublandlord will not be liable for any termination of the Prime Lease. This provision may allow Sublandlord the opportunity to exercise its termination rights under the Prime Lease without resulting liability to Subtenant under the Sublease.

In the event the Subtenant has a much stronger bargaining position, it may insist upon an affirmative obligation of Sublandlord to keep the Prime Lease in effect. Such a provision would require that Sublandlord refrain from exercising any termination rights under the Prime Lease absent an expiration or earlier termination of the Sublease. In any event, Sublandlord should offset this obligation with the requirement that Subtenant remain in good standing under the Sublease:

Provided Subtenant is not in default in connection with any of the material terms and conditions of Subtenant to be performed hereunder beyond any applicable cure period, Sublandlord agrees to keep the Prime Lease in full force and effect without default or amendment.

The Privity Issue

In several of the sample provisions noted in this article, the Subtenant is taking on the responsibility of looking solely to the Prime Landlord for obligations such as maintenance, repairs, and restoration of the property in the event of a condemnation. When presented with these provisions, and absent a joinder to the Sublease by Prime Landlord, the Subtenant will often respond that it has no privity with the Prime Landlord, and is in no position to make the Prime Landlord perform. From a Sublandlord's perspective, the Sublandlord does not want to be in a position of being in default under the Sublease for failure of the Prime Landlord to perform under the Prime Lease. A suggested resolution to this issue is to add a provision that requires Sublandlord to use commercially reasonable efforts to enforce its rights under the Sublease, but without any obligation on the part of the Sublandlord to bring suit against the Prime Landlord. Sublandlord may also assign its right to sue under the Prime Lease to Subtenant.

Example:

If Prime Landlord shall be in default of any of its obligations under the Prime Lease with respect to the Sublet Premises, Subtenant shall be entitled to all rights and remedies against Prime Landlord which Sublandlord would otherwise be entitled to under the Prime Lease as a result of such default, subject, however, to the following provisions and procedures: insofar as Prime Landlord is or may be obligated to furnish any services to the Sublet Premises, to repair or rebuild the same, to perform any other act whatsoever with respect to the Sublet Premises or to perform any obligation or satisfy any condition under the Prime Lease, Subtenant expressly acknowledges that Sublandlord does not undertake the performance or observance of such obligations, but is only obligated to use reasonable efforts to obtain Prime Landlord's performance for Subtenant's benefit and without obligating itself to institute legal action or incur any expense. Upon Subtenant's request, Sublandlord shall in good faith attempt to obtain Prime Landlord's performance for Subtenant's benefit and in connection therewith, shall participate in discussions and meetings with Prime Landlord, write letters to Prime Landlord and take other reasonable action. If after receipt of written request from Subtenant, Sublandlord fails or refuses to take appropriate action for the enforcement of Sublandlord's rights against Prime Landlord with respect to the Sublet Premises, Subtenant shall have the right to take such action in Subtenant's own name, but only for that purpose and only to such extent, and Subtenant shall be subrogated to Sublandlord's rights under the Prime Lease to the extent that the same shall apply to the Sublet Premises and Sublandlord will cooperate fully with Subtenant (including signing any pleadings) in such enforcement efforts so long as Sublandlord does not incur any costs in so doing.

Part Three of this article will present the Subtenant'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 is an associate in the firm's Atlanta office. He 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. Natosha O. Reid is an associate in the firm's Atlanta office. Her practice focuses on commercial real estate development, acquisitions, dispositions, and leasing.