Occupants of commercial buildings often believe that drafting and negotiating a sublease with an existing tenant is a simple process that is easier than drafting and negotiating a direct lease with a landlord. A sublease, however, has many hidden traps that often complicate this process.
Prior to drafting a sublease, the sublandlord’s lease with the master landlord (often called the “master lease”) must be reviewed to identify whether the master landlord’s consent is required for the sublease and whether the master landlord has the right to terminate the master lease in response to a request for a sublease. In addition, the master lease might provide that the master landlord has the right to receive some or all of the sublease rents and the right to be reimbursed for its costs related to reviewing any proposed sublease transaction.
Subleases often include a general provision that the subtenant is to comply with all of the terms and conditions of the master lease as such provisions relate to the subleased premises. This type of provision should be thoroughly evaluated since the master lease might include provisions that are specific to the sublandlord (such as specific use restrictions) that are not applicable to the subtenant.
Another issue when drafting and negotiating a sublease is whether the master landlord will grant “non-disturbance” to the subtenant in the event the master lease is terminated due to a default by the sublandlord. From the subtenant’s perspective, if the subtenant is complying with the terms and conditions of the sublease, the subtenant should have the full right to use and occupy the subleased premises. From the master landlord’s perspective, if the sublandlord has defaulted under the master lease, the master landlord should have the right to exercise all of its rights under the master lease, including the right to terminate the master lease and all rights of occupancy thereunder (including the rights of occupancy under the sublease).
As a compromise to this non-disturbance issue, the master landlord might allow the subtenant to cure the defaults of the sublandlord and, in the event of such cure, the rights of the subtenant under the sublease will be recognized. There are two major issues with this compromise. The first is that the subrent in the sublease may be less than the rent in the master lease and, therefore, the subtenant will be obligated to pay more than it bargained to have its sublease rights protected. The second is that the sublease space may be less than the space being leased under the master lease. As with the first issue, the subtenant will then have to pay rent for the entire space being leased under the master lease in order to cure the default and, as a result, the subtenant will again be paying more than it bargained in order to have its sublease rights protected.
Due to the complex issues raised by a sublease, there is no such thing as a “simple sublease” and it is important to have the cooperation of the master landlord in order to fully protect the subtenant’s rights.