In the Spotlight: Master Lease Boilerplates

Although boilerplate provisions may (and probably should) be contained in the body of the sublease, most subleases do not contain many (if any) boilerplate provisions. Instead, subleases typically “incorporate by reference” the boilerplate provisions of the master lease. The rationale for this is to have a short sublease agreement and avoid having two different sets of the boilerplate provisions, thereby reducing drafting and negotiating time and minimizing legal fees. Incorporation by reference is usually accomplished using one of two methods, which shall be called the general incorporation method and the specific incorporation method.

General Incorporation Method

The general incorporation method incorporates into the sublease all provisions of the master lease, other than those provisions of the master lease that are specifically excluded. Below is a simple, watered-down example of the general method, including caveats and modifications to the incorporated provisions:

All of the provisions of the Master Lease are incorporated into this Sublease, and made an integral part hereof; provided, however, with respect to Section __, the Subtenant must deliver notice within five days instead of ten days and, with respect to Section __, Subtenant shall not be required to remove any of Sublandlord”s alterations. Notwithstanding the foregoing, the following provisions of the Master Lease shall not be incorporated into this Sublease: Sections __,__, __, __ (the first two sentences only) and __ (the last sentence only).

Specific Incorporation Method

The specific incorporation method incorporates into the sublease only specified provisions of the master lease. Below is a simple, watered-down example of the specific method, including caveats and modifications to the incorporated provisions:

The following provisions of the Master Lease are incorporated into this Sublease, and made an integral part hereof: Sections __, __, __ (other than the first two sentences), __ (other than the last sentence), __ (except that Subtenant must deliver notice within five days instead of ten days) and __ (except that Subtenant shall not be required to remove any of Sublandlord”s alterations).

Specific Incorporation Is the Better Method

The specific incorporation method should be used instead of the general incorporation method for several reasons.

Unintended Results Less Likely

First and foremost, the specific method is less likely to have unintended results because incorporating only specific lease provisions requires a more thorough and careful review of the master lease. One area where this is particularly true is assignment/subletting. Although most subleases contain a brief section providing that the subtenant may not assign or sublease without the consent of both the sublandlord and landlord, subleases often incorporate most (if not all) of the assignment/subletting provisions of the master lease, which provisions may contain a comprehensive list of items permitting the landlord to withhold consent in its sole discretion, recapture rights, change of control provisions and bonus rent provisions. Broad incorporation of the assignment/subletting provisions of the master lease probably benefits the sublandlord more than the subtenant. For instance, most subtenants would not want the sublandlord to be able to recapture the subleased premises; and, no subtenant would want to allow the sublandlord to withhold consent in its sole discretion based upon the existence of conditions that should only apply to the landlord (such as, for example, the availability of other space or the sub-sublease not being for a market rent).

The change of control and bonus rent provisions of the master lease should also be analyzed and, if necessary, reconciled with the change of control and bonus rent provisions in the body of the sublease.

A thorough review of the master lease may also disclose master lease provisions that need to be modified or waived, which modifications and waivers can be effected in the landlord”s consent document. For example, the master lease may only permit one subtenant. Consequently, if the sublease covers a large amount of space and/or is for a long term, the subtenant should consider making it a condition to the effectiveness of the sublease that the landlord modify or waive this so as to permit the subtenant to enter into a sub-sublease.

The distinction between incorporation of the master lease provisions, on the one hand, and the sublease being subordinate and subject to the master lease provisions, on the other, is often misunderstood by the parties and their counsel, and this is yet another reason for a thorough review of the master lease. Incorporation results in the master lease provisions becoming contractual obligations between the sublandlord and the subtenant, and incorporation must be done expressly. Although the sublease and the subtenant”s rights thereunder are subordinate and subject to the master lease provisions unless the landlord expressly agrees otherwise (and landlords rarely agree otherwise), sublandlords often feel the need to incorporate all master lease provisions containing tenant obligations, resulting in the incorporation of master lease provisions that should not be incorporated.

For example, sublandlords often incorporate all of the building rules and regulations contained in the master lease, which typically require (among other things) that the landlord”s approval be obtained for matters such as the hanging of pictures on the wall. Does the subtenant really want to request the sublandlord”s approval before hanging each and every picture on the wall, and does the sublandlord really want to have to give such approval?

Drafting Flexibility

The specific method provides more drafting flexibility by easily and efficiently allowing caveats and modifications to the incorporated lease provisions in a parenthetical immediately following the section/paragraph number of the incorporated master lease provision (note the parentheticals in the above example of the specific method). Although caveats and modifications can also be accomplished with parentheticals under the general incorporation method (note the parentheticals in the above example of the general method), the use of parentheticals with the general method is more cumbersome and may result in ambiguity since most or all of the caveats and modifications are to excluded provisions (rather than to included provisions).

Less Reliance on General Provisions Regarding
Incorporation

If implemented correctly, the specific method should require less reliance on the general provisions of the sublease governing incorporation by reference. Such general provisions, which benefit the sublandlord more than the subtenant, generally provide that the subtenant must look to the landlord to provide utilities, building services and satisfy other landlord obligations under the master lease, that the sublease is subordinate and subject to the master lease, that the subtenant must obtain the landlord”s consent pursuant to the terms of the master lease, and that, in the event of conflict, the specific provisions of the sublease govern over the incorporated provisions of the master lease. In the event a dispute arises with respect to incorporated provisions of the master lease, the parties should not have to rely on such general provisions, and the specific method minimizes such reliance by resulting in the sublease containing more specific provisions.

Partial Subleases

The advantages of the specific method over the general method especially apply to partial subleases (which are those covering less than all of the premises leased under the master lease), because a partial sublease requires a more thorough review of the master lease and more drafting flexibility. Issues that partial subleases must address include whether the sublandlord or the subtenant has primary responsibility for complying with the terms and conditions of the master lease as they pertain to the subleased premises (including maintenance, repairs, replacements, compliance with laws, codes and insurance requirements, and restoration of the subleased premises upon termination of the master lease or in the event of casualty damage), whether the subtenant is permitted to assign or sublease, and whether the sublandlord is permitted or obligated to exercise termination, extension, expansion or other options under the master lease.

Conclusion

The specific incorporation method is clearly better than the general incorporation method; however, because the specific method requires a more thorough and careful review of the master lease and requires more time to draft, preparing a sublease using the specific method will result in a longer drafting period and additional legal fees, and may result in more negotiations between the sublandlord and subtenant. Nevertheless, avoiding or being able to resolve just one dispute between the parties quickly makes the additional time and legal fees worthwhile.

Amadeo F. Cant”, Jr. is a partner in the Real Estate Practice Group of Seyfarth Shaw LLP (Los Angeles office). His practice concentrates primarily on the acquisition, financing, leasing and disposition of commercial properties. He can be reached at 213-270-9641 or [email protected].

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Preparing and negotiating sublease agreements can be much more difficult than preparing and negotiating lease agreements. This is especially true with respect to so-called “boilerplate” provisions. Boilerplate provisions are those that do not contain basic/economic terms (such as square footage, term and rent) and include provisions regarding maintenance, repairs, replacements, interruptions in services, assignment/subletting and casualty.

Attorneys frequently do not pay much attention to boilerplate provisions in leases, and this is particularly true with subleases. This can lead to major problems after the sublease is executed, considering that subleases involve three parties and three documents (namely, the sublease, the master lease between the sublandlord and the landlord, and the document containing the landlord”s consent to the sublease). As a matter of law, as between the subtenant and the landlord, there is no privity of contract (although there is privity of estate). This means that there is no contractual arrangement between the subtenant and the landlord and, therefore, the subtenant must look to the sublandlord to provide (or cause the landlord to provide) utilities and other services and to exercise rights and remedies against the landlord on the subtenant”s behalf. Most landlords go out of their way to make it abundantly clear ” usually in the landlord”s consent document ” that there is no privity of contract with the subtenant.

Incorporation By Reference

Although boilerplate provisions may (and probably should) be contained in the body of the sublease, most subleases do not contain many (if any) boilerplate provisions. Instead, subleases typically “incorporate by reference” the boilerplate provisions of the master lease. The rationale for this is to have a short sublease agreement and avoid having two different sets of the boilerplate provisions, thereby reducing drafting and negotiating time and minimizing legal fees. Incorporation by reference is usually accomplished using one of two methods, which shall be called the general incorporation method and the specific incorporation method.

General Incorporation Method

The general incorporation method incorporates into the sublease all provisions of the master lease, other than those provisions of the master lease that are specifically excluded. Below is a simple, watered-down example of the general method, including caveats and modifications to the incorporated provisions:

All of the provisions of the Master Lease are incorporated into this Sublease, and made an integral part hereof; provided, however, with respect to Section __, the Subtenant must deliver notice within five days instead of ten days and, with respect to Section __, Subtenant shall not be required to remove any of Sublandlord”s alterations. Notwithstanding the foregoing, the following provisions of the Master Lease shall not be incorporated into this Sublease: Sections __,__, __, __ (the first two sentences only) and __ (the last sentence only).

Specific Incorporation Method

The specific incorporation method incorporates into the sublease only specified provisions of the master lease. Below is a simple, watered-down example of the specific method, including caveats and modifications to the incorporated provisions:

The following provisions of the Master Lease are incorporated into this Sublease, and made an integral part hereof: Sections __, __, __ (other than the first two sentences), __ (other than the last sentence), __ (except that Subtenant must deliver notice within five days instead of ten days) and __ (except that Subtenant shall not be required to remove any of Sublandlord”s alterations).

Specific Incorporation Is the Better Method

The specific incorporation method should be used instead of the general incorporation method for several reasons.

Unintended Results Less Likely

First and foremost, the specific method is less likely to have unintended results because incorporating only specific lease provisions requires a more thorough and careful review of the master lease. One area where this is particularly true is assignment/subletting. Although most subleases contain a brief section providing that the subtenant may not assign or sublease without the consent of both the sublandlord and landlord, subleases often incorporate most (if not all) of the assignment/subletting provisions of the master lease, which provisions may contain a comprehensive list of items permitting the landlord to withhold consent in its sole discretion, recapture rights, change of control provisions and bonus rent provisions. Broad incorporation of the assignment/subletting provisions of the master lease probably benefits the sublandlord more than the subtenant. For instance, most subtenants would not want the sublandlord to be able to recapture the subleased premises; and, no subtenant would want to allow the sublandlord to withhold consent in its sole discretion based upon the existence of conditions that should only apply to the landlord (such as, for example, the availability of other space or the sub-sublease not being for a market rent).

The change of control and bonus rent provisions of the master lease should also be analyzed and, if necessary, reconciled with the change of control and bonus rent provisions in the body of the sublease.

A thorough review of the master lease may also disclose master lease provisions that need to be modified or waived, which modifications and waivers can be effected in the landlord”s consent document. For example, the master lease may only permit one subtenant. Consequently, if the sublease covers a large amount of space and/or is for a long term, the subtenant should consider making it a condition to the effectiveness of the sublease that the landlord modify or waive this so as to permit the subtenant to enter into a sub-sublease.

The distinction between incorporation of the master lease provisions, on the one hand, and the sublease being subordinate and subject to the master lease provisions, on the other, is often misunderstood by the parties and their counsel, and this is yet another reason for a thorough review of the master lease. Incorporation results in the master lease provisions becoming contractual obligations between the sublandlord and the subtenant, and incorporation must be done expressly. Although the sublease and the subtenant”s rights thereunder are subordinate and subject to the master lease provisions unless the landlord expressly agrees otherwise (and landlords rarely agree otherwise), sublandlords often feel the need to incorporate all master lease provisions containing tenant obligations, resulting in the incorporation of master lease provisions that should not be incorporated.

For example, sublandlords often incorporate all of the building rules and regulations contained in the master lease, which typically require (among other things) that the landlord”s approval be obtained for matters such as the hanging of pictures on the wall. Does the subtenant really want to request the sublandlord”s approval before hanging each and every picture on the wall, and does the sublandlord really want to have to give such approval?

Drafting Flexibility

The specific method provides more drafting flexibility by easily and efficiently allowing caveats and modifications to the incorporated lease provisions in a parenthetical immediately following the section/paragraph number of the incorporated master lease provision (note the parentheticals in the above example of the specific method). Although caveats and modifications can also be accomplished with parentheticals under the general incorporation method (note the parentheticals in the above example of the general method), the use of parentheticals with the general method is more cumbersome and may result in ambiguity since most or all of the caveats and modifications are to excluded provisions (rather than to included provisions).

Less Reliance on General Provisions Regarding
Incorporation

If implemented correctly, the specific method should require less reliance on the general provisions of the sublease governing incorporation by reference. Such general provisions, which benefit the sublandlord more than the subtenant, generally provide that the subtenant must look to the landlord to provide utilities, building services and satisfy other landlord obligations under the master lease, that the sublease is subordinate and subject to the master lease, that the subtenant must obtain the landlord”s consent pursuant to the terms of the master lease, and that, in the event of conflict, the specific provisions of the sublease govern over the incorporated provisions of the master lease. In the event a dispute arises with respect to incorporated provisions of the master lease, the parties should not have to rely on such general provisions, and the specific method minimizes such reliance by resulting in the sublease containing more specific provisions.

Partial Subleases

The advantages of the specific method over the general method especially apply to partial subleases (which are those covering less than all of the premises leased under the master lease), because a partial sublease requires a more thorough review of the master lease and more drafting flexibility. Issues that partial subleases must address include whether the sublandlord or the subtenant has primary responsibility for complying with the terms and conditions of the master lease as they pertain to the subleased premises (including maintenance, repairs, replacements, compliance with laws, codes and insurance requirements, and restoration of the subleased premises upon termination of the master lease or in the event of casualty damage), whether the subtenant is permitted to assign or sublease, and whether the sublandlord is permitted or obligated to exercise termination, extension, expansion or other options under the master lease.

Conclusion

The specific incorporation method is clearly better than the general incorporation method; however, because the specific method requires a more thorough and careful review of the master lease and requires more time to draft, preparing a sublease using the specific method will result in a longer drafting period and additional legal fees, and may result in more negotiations between the sublandlord and subtenant. Nevertheless, avoiding or being able to resolve just one dispute between the parties quickly makes the additional time and legal fees worthwhile.

Amadeo F. Cant”, Jr. is a partner in the Real Estate Practice Group of Seyfarth Shaw LLP (Los Angeles office). His practice concentrates primarily on the acquisition, financing, leasing and disposition of commercial properties. He can be reached at 213-270-9641 or [email protected].

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