Sub-Lease – A Sub-Landlords Perspective

Last week we discussed about the issues that the sub-tenant must be cautious about .This week let us see it from a sub-landlords perspective.

Sub landlords Beware:

Primary Liability:

• Sub-landlords must understand that they will remain primarily liable to the landlord for all lease obligations even if such obligations are “subleased” to a subtenant.
• The sub-landlord will remain as a “middleman” between the landlord and the subtenant, ensuring payment of the rent to the landlord and the provision of building services to the subtenant.
• They must understand that the landlord will review all actions or failures to act of the subtenant to be failures of the sub-landlord. Thus, the sub-landlord confronts a similar loss of control as noted with regard to subtenants.
• For example, under a lease assignment, the original tenant gives up its lease rights for good, but normally continues to remain responsible for lease obligations.
• If a sub-landlord agrees to allow a subtenant to pay its rent directly to the landlord, it may be more difficult for the sub-landlord to protect against defaults due to nonpayment of rent.
• It is often in a sub-landlord’s interest to structure a transaction as a sublease, rather than a lease assignment, and to control rent payments to and all communications with the landlord.
• The prospective sub-landlord should ensure that the sublease document contains a covenant by the subtenant not to cause any default under the prime lease.

Incorporation of Prime Lease:

• It is critical for sub-landlords that the sublease carefully incorporates the applicable terms of the original lease as obligations of each party. The sub-landlord should also take care to avoid agreeing to perform a original lease obligation that only the landlord can perform.
• Sub-landlords have the same interest as subtenants in conditioning the commencement of the sublease on receipt of the landlord’s consent.

A sublease can be a more complex transaction than a “regular” lease due to the interplay between the terms of the original lease and the agreement of the sublease parties. This interplay of the two documents and the legal risks inherent in subleases should be understood by all parties. Sub-landlords and sub-tenants operating in commercial leasing are well advised to consult with a qualified real estate broker and real estate attorney when structuring sublease transactions. Certain risks inherent in the process can be alleviated for both parties provided  proper planning, documentation and organization are considered at the outset of such transaction.