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

Parts One and Two of this series discussed subleasing from the perspective of the Prime Landlord and Sublandlord, respectively. This final installment addresses the issue from the Subtenant's perspective.

Subtenant

When negotiating a Sublease from the Subtenant's perspective, the Subtenant usually does not have much bargaining power unless the Subtenant is a major tenant in other spaces on the Prime Landlord's property. As a result, many of the items discussed below may not be obtainable, but should be evaluated on a case-by-case basis.

Review of Prime Lease

Because the Subtenant's rights extend directly from the Prime Lease, it is extremely important to review the Prime Lease between the Prime Landlord and the Sublandlord thoroughly. When reviewing the Prime Lease, pay particular attention to any provisions that create obligations for the Sublandlord that will not be assumed by the Subtenant. For instance, if the Prime Lease requires the Sublandlord to pay CAM charges or a proportional share of operating expenses and the business deal with the Subtenant only includes a 'gross' rent payment, then the provision requiring payment of these charges should be excluded in the Sublease. In addition, when reviewing the Prime Lease, it is important to review the termination rights of both the Prime Landlord and the Sublandlord. For instance, the Subtenant does not want the Sublandlord or the Prime Landlord to terminate the Prime Lease without allowing the Subtenant to cure any breaches by the Sublandlord before the Prime Landlord actually terminates the Prime Lease.

Notice of Sublandlord's Default under the Prime Lease

After reviewing the Prime Lease and while preparing the Sublease, you should make sure that all notices of any defaults or breaches by the Sublandlord are sent directly to the Subtenant. The Sublease should provide that in the event of a default by the Sublandlord, the Subtenant should receive notice of such default and have the right, but not the obligation, to cure the Sublandlord's default. The Sublease, or the Consent to Sublease which is drafted in connection with the Sublease, should include language to allow Subtenant to cure Sublandlord's default(s).

Example:

Prime Landlord hereby agrees that it will not exercise any right to terminate the Prime Lease on account of an event of default without having first given to Subtenant (a) notice of Sublandlord's default(s) under the Prime Lease, and (b) an opportunity to remedy any Sublandlord default under the Prime Lease, or to cause any default of Sublandlord under the Prime Lease to be remedied, within the time periods provided in the Prime Lease for cure by Sublandlord.

Provision of Services

A Sublease from an experienced Sublandlord will usually provide that the Subtenant will look to the Prime Landlord and not to the Sublandlord for the provision of services such as heating, air conditioning, and water. Ideally, the Subtenant will want the Sublandlord to agree to take legal action to ensure that the Prime Landlord provides services to the Subtenant's space. However, if the Sublandlord will not agree to take legal action, the Subtenant should at least insist that the Sublandlord assign its rights to receive the services and to covenant to use commercially reasonable efforts to get the Prime Landlord to provide the necessary services to the Subtenant's space. A Prime Landlord may allow the Sublandlord to assign its rights to the Subtenant to enforce the Prime Landlord's obligations with respect to services and maintenance and repair of the subleased premises, but will often require a release from any claims or liabilities related to the Sublease.

Example:

Nothing in this Agreement or otherwise shall create privity of estate between Prime Landlord and Subtenant, and Subtenant irrevocably waives any claims based on, or alleged to have arisen from, such an estate, provided however, that Subtenant shall have the right to contact Prime Landlord directly (with a copy to Sublandlord) to request Prime Landlord perform its obligations under the Prime Lease with respect to the Subleased Premises (e.g., Prime Landlord's maintenance and repair obligations and obligations to provide services to the Subleased Premises in accordance with the Prime Lease). Subtenant and Sublandlord each hereby release, acquit and forever discharge Prime Landlord and its agents, employees, officers, directors, partners and affiliates from any and all claims, liabilities and obligations arising out of or in any way related to the Sublease which Subtenant or Sublandlord or any party claiming by, through or under either of them now has or may ever have in the future against Prime Landlord or any of such other parties; provided however, the foregoing release shall not affect or diminish Prime Landlord's obligations arising under the Prime Lease, or from Sublandlord's right to enforce the provisions of the Prime Lease for its and Subtenant's benefit. Sublandlord shall not be precluded from assigning to Subtenant the right for Subtenant to enforce Prime Landlord's obligations under the Prime Lease to the extent they apply to the Subleased Premises (e.g., Prime Landlord's maintenance and repair obligations and Sublandlord's obligations to provide services to the Subleased Premises). Subtenant and Sublandlord acknowledge that Prime Landlord would not have entered into this Sublease without such release.

Approval Rights

Another important section to include in the Sublease is a section regarding Prime Landlord approvals. On certain items where the Subtenant needs the Prime Landlord's consent, such as tenant improvement, signage, and directory listings, the Sublandlord's approval should be deemed given if the Prime Landlord approves of such items. If these items are crucial, then it is very important for the Subtenant to have them pre-approved in the Consent to Sublease between Sublandlord, Subtenant, and Prime Landlord.

Further Assignment or Subleasing

The Subtenant can also request the right to further assign or sublease its rights under the Sublease. The Prime Landlord will generally resist the request, but in the Consent to Sublease, the Subtenant should insist on getting the Prime Landlord to approve the Subtenant's right to sublease or assign its interests to affiliates and in connection with mergers and acquisitions, so as not to prevent or delay the Subtenant's future corporate transactions.

Non-Disturbance

As noted above, one of the most aggressive items to include in the Sublease is a non-disturbance agreement from the Prime Landlord stating that if the Sublandlord's lease is terminated, then the Subtenant can remain in the space under the same terms as the Sublease. Ideally, the Subtenant would like to have the Prime Landlord agree that, if the Prime Lease is terminated, the Subtenant may remain in possession on all the terms and conditions of the Sublease. However, even if the Prime Landlord agrees to provide non-disturbance protection, if the Subtenant's fixed rent is less than the fixed rent owed by the Sublandlord, the Prime Landlord will often insist that the Subtenant's fixed rent be increased to the Sublandlord's fixed rent amount. This scenario will usually only work if the Subtenant has bargaining power. The following is an example of a provision, to be included in the Consent to Sublease, that accomplishes this modified non-disturbance right.

Example:

In the event of the cancellation or termination of the Prime Lease as a result of an event of default by Sublandlord, and, if immediately prior to such termination, the Sublease shall be in full force and effect, Subtenant shall attorn to Prime Landlord pursuant to the then executory provisions of the Sublease. The Sublease automatically shall continue in full force and effect as a direct lease from Prime Landlord to the Subtenant without the need for the execution of any additional documents, except that (a) if the fixed rent from time to time payable under the Sublease for any period from and after the date of termination of the Prime Lease is less than an amount equal to the aggregate of all base rent and additional rent which would have been payable by Sublandlord to the Prime Landlord under the Prime Lease for such period with respect to the Subleased Premises had the Prime Lease not been terminated, then the fixed rent payable under the Sublease for such period automatically shall be increased to such greater amount, (b) Sublandlord shall be bound by all of the other terms, covenants and conditions of the Prime Lease, whether or not expressly incorporated in the Sublease and in the event of any inconsistency, the terms and conditions of the Prime Lease shall control, and (c) Prime Landlord shall not be liable for any previous act or omission of Sublandlord under the Sublease.

Conclusion

The three parts of this series have presented various negotiating points from the perspective of Prime Landlord, Sublandlord, and Subtenant. Sublease negotiation seeks the successful resolution of the competing interests of these parties. In order to advocate efficiently and effectively on behalf of your client, it is important to assess your client's relative bargaining strength in the transaction, as well as to gain a thorough understanding of its legal and business needs.

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. She represents clients in office, retail, multifamily, senior housing, industrial, and affordable housing property transactions.

Parts One and Two of this series discussed subleasing from the perspective of the Prime Landlord and Sublandlord, respectively. This final installment addresses the issue from the Subtenant's perspective.

Subtenant

When negotiating a Sublease from the Subtenant's perspective, the Subtenant usually does not have much bargaining power unless the Subtenant is a major tenant in other spaces on the Prime Landlord's property. As a result, many of the items discussed below may not be obtainable, but should be evaluated on a case-by-case basis.

Review of Prime Lease

Because the Subtenant's rights extend directly from the Prime Lease, it is extremely important to review the Prime Lease between the Prime Landlord and the Sublandlord thoroughly. When reviewing the Prime Lease, pay particular attention to any provisions that create obligations for the Sublandlord that will not be assumed by the Subtenant. For instance, if the Prime Lease requires the Sublandlord to pay CAM charges or a proportional share of operating expenses and the business deal with the Subtenant only includes a 'gross' rent payment, then the provision requiring payment of these charges should be excluded in the Sublease. In addition, when reviewing the Prime Lease, it is important to review the termination rights of both the Prime Landlord and the Sublandlord. For instance, the Subtenant does not want the Sublandlord or the Prime Landlord to terminate the Prime Lease without allowing the Subtenant to cure any breaches by the Sublandlord before the Prime Landlord actually terminates the Prime Lease.

Notice of Sublandlord's Default under the Prime Lease

After reviewing the Prime Lease and while preparing the Sublease, you should make sure that all notices of any defaults or breaches by the Sublandlord are sent directly to the Subtenant. The Sublease should provide that in the event of a default by the Sublandlord, the Subtenant should receive notice of such default and have the right, but not the obligation, to cure the Sublandlord's default. The Sublease, or the Consent to Sublease which is drafted in connection with the Sublease, should include language to allow Subtenant to cure Sublandlord's default(s).

Example:

Prime Landlord hereby agrees that it will not exercise any right to terminate the Prime Lease on account of an event of default without having first given to Subtenant (a) notice of Sublandlord's default(s) under the Prime Lease, and (b) an opportunity to remedy any Sublandlord default under the Prime Lease, or to cause any default of Sublandlord under the Prime Lease to be remedied, within the time periods provided in the Prime Lease for cure by Sublandlord.

Provision of Services

A Sublease from an experienced Sublandlord will usually provide that the Subtenant will look to the Prime Landlord and not to the Sublandlord for the provision of services such as heating, air conditioning, and water. Ideally, the Subtenant will want the Sublandlord to agree to take legal action to ensure that the Prime Landlord provides services to the Subtenant's space. However, if the Sublandlord will not agree to take legal action, the Subtenant should at least insist that the Sublandlord assign its rights to receive the services and to covenant to use commercially reasonable efforts to get the Prime Landlord to provide the necessary services to the Subtenant's space. A Prime Landlord may allow the Sublandlord to assign its rights to the Subtenant to enforce the Prime Landlord's obligations with respect to services and maintenance and repair of the subleased premises, but will often require a release from any claims or liabilities related to the Sublease.

Example:

Nothing in this Agreement or otherwise shall create privity of estate between Prime Landlord and Subtenant, and Subtenant irrevocably waives any claims based on, or alleged to have arisen from, such an estate, provided however, that Subtenant shall have the right to contact Prime Landlord directly (with a copy to Sublandlord) to request Prime Landlord perform its obligations under the Prime Lease with respect to the Subleased Premises (e.g., Prime Landlord's maintenance and repair obligations and obligations to provide services to the Subleased Premises in accordance with the Prime Lease). Subtenant and Sublandlord each hereby release, acquit and forever discharge Prime Landlord and its agents, employees, officers, directors, partners and affiliates from any and all claims, liabilities and obligations arising out of or in any way related to the Sublease which Subtenant or Sublandlord or any party claiming by, through or under either of them now has or may ever have in the future against Prime Landlord or any of such other parties; provided however, the foregoing release shall not affect or diminish Prime Landlord's obligations arising under the Prime Lease, or from Sublandlord's right to enforce the provisions of the Prime Lease for its and Subtenant's benefit. Sublandlord shall not be precluded from assigning to Subtenant the right for Subtenant to enforce Prime Landlord's obligations under the Prime Lease to the extent they apply to the Subleased Premises (e.g., Prime Landlord's maintenance and repair obligations and Sublandlord's obligations to provide services to the Subleased Premises). Subtenant and Sublandlord acknowledge that Prime Landlord would not have entered into this Sublease without such release.

Approval Rights

Another important section to include in the Sublease is a section regarding Prime Landlord approvals. On certain items where the Subtenant needs the Prime Landlord's consent, such as tenant improvement, signage, and directory listings, the Sublandlord's approval should be deemed given if the Prime Landlord approves of such items. If these items are crucial, then it is very important for the Subtenant to have them pre-approved in the Consent to Sublease between Sublandlord, Subtenant, and Prime Landlord.

Further Assignment or Subleasing

The Subtenant can also request the right to further assign or sublease its rights under the Sublease. The Prime Landlord will generally resist the request, but in the Consent to Sublease, the Subtenant should insist on getting the Prime Landlord to approve the Subtenant's right to sublease or assign its interests to affiliates and in connection with mergers and acquisitions, so as not to prevent or delay the Subtenant's future corporate transactions.

Non-Disturbance

As noted above, one of the most aggressive items to include in the Sublease is a non-disturbance agreement from the Prime Landlord stating that if the Sublandlord's lease is terminated, then the Subtenant can remain in the space under the same terms as the Sublease. Ideally, the Subtenant would like to have the Prime Landlord agree that, if the Prime Lease is terminated, the Subtenant may remain in possession on all the terms and conditions of the Sublease. However, even if the Prime Landlord agrees to provide non-disturbance protection, if the Subtenant's fixed rent is less than the fixed rent owed by the Sublandlord, the Prime Landlord will often insist that the Subtenant's fixed rent be increased to the Sublandlord's fixed rent amount. This scenario will usually only work if the Subtenant has bargaining power. The following is an example of a provision, to be included in the Consent to Sublease, that accomplishes this modified non-disturbance right.

Example:

In the event of the cancellation or termination of the Prime Lease as a result of an event of default by Sublandlord, and, if immediately prior to such termination, the Sublease shall be in full force and effect, Subtenant shall attorn to Prime Landlord pursuant to the then executory provisions of the Sublease. The Sublease automatically shall continue in full force and effect as a direct lease from Prime Landlord to the Subtenant without the need for the execution of any additional documents, except that (a) if the fixed rent from time to time payable under the Sublease for any period from and after the date of termination of the Prime Lease is less than an amount equal to the aggregate of all base rent and additional rent which would have been payable by Sublandlord to the Prime Landlord under the Prime Lease for such period with respect to the Subleased Premises had the Prime Lease not been terminated, then the fixed rent payable under the Sublease for such period automatically shall be increased to such greater amount, (b) Sublandlord shall be bound by all of the other terms, covenants and conditions of the Prime Lease, whether or not expressly incorporated in the Sublease and in the event of any inconsistency, the terms and conditions of the Prime Lease shall control, and (c) Prime Landlord shall not be liable for any previous act or omission of Sublandlord under the Sublease.

Conclusion

The three parts of this series have presented various negotiating points from the perspective of Prime Landlord, Sublandlord, and Subtenant. Sublease negotiation seeks the successful resolution of the competing interests of these parties. In order to advocate efficiently and effectively on behalf of your client, it is important to assess your client's relative bargaining strength in the transaction, as well as to gain a thorough understanding of its legal and business needs.

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. She represents clients in office, retail, multifamily, senior housing, industrial, and affordable housing property transactions.