Experience

Sublease Protections Needed
by Landlords and Tenants

By Ed Chanin

With the amount of space currently available for sublease in the Twin Cities at perhaps an all time high, landlords are being asked more frequently by tenants to consent to proposed subleases. Landlords must, however, be careful when consenting to proposed subleases and subtenants must be careful in entering into subleases because, absent some agreement which has been signed by the landlord and the subtenant, the landlord and subtenant will have no express contractual relationship with each other and their rights against each other will be based on the legal concept known as "privity of estate."

Ideally, a landlord's consent to a proposed sublease will be set forth in a Consent to Sublease Agreement which will be executed by the landlord, the tenant and the subtenant. The Consent to Sublease Agreement should describe the sublease to which the landlord is consenting, the premises being subleased, the term of the sublease and, at a minimum, include the following basic provisions to protect the landlord:

• State that the landlord's consent to the sublease will not operate to release the tenant from, and the tenant will remain fully liable for, all of the tenant¹s obligations under the lease.
  
• Require the subtenant to agree to be legally bound by all of the provisions of the lease to the extent applicable to the subleased premises and further agree that the landlord shall have the right to enforce such provisions directly against the subtenant. It is good practice to have the subtenant specifically agree in the Consent to Sublease Agreement to maintain the liability insurance required of the tenant under the lease, to indemnify the landlord as required of the tenant under the lease with respect to the subleased premises and to comply with the permitted use provisions.
  
• Make it clear that neither the execution of the sublease nor the Consent to Sublease Agreement creates any direct rights in favor of subtenant against landlord.
  
• Make it clear that the landlord is not consenting to the specific terms of the sublease and that if any provision in the sublease conflicts with any provision in the lease, such provision in the sublease will not be binding on landlord.
  
• Make it clear that landlord's consent to the proposed sublease is not intended to affect in any manner the obligation of tenant and/or subtenant to obtain landlord¹s consent to any future sublease or assignment.
  
• Make it clear that both the tenant and the subtenant will be obligated to reimburse the landlord for any attorney's fees or other costs incurred by landlord in consenting to the sublease.
  
• Contain representations and warranties from the tenant and the subtenant that the sublease describes the entire transaction between tenant and subtenant with respect to the subleased premises.
  
• Require tenant and subtenant to indemnify landlord against any claims for brokerage fees or commissions because of the sublease.
  
• State that the provisions in the Consent to Sublease Agreement will be binding on tenant and subtenant.

Although landlords usually have the leverage they need to obtain the direct contractual rights they should have against subtenants, subtenants are typically at a disadvantage in seeking to establish direct rights against landlords even though the lack of such rights could prove disastrous to the subtenant. A subtenant's right to possession of the subleased premises, absent a direct agreement to the contrary with the landlord, will terminate if the lease between its sublandlord, as tenant, and the landlord is terminated because of the sublandlord's default. Although the subtenant in such case may sue its sublandlord for damages, those rights may be of little value.

A subtenant that expects to make significant leasehold improvements to the subleased premises or will otherwise incur significant costs in moving to the subleased premises would like to have the landlord agree in writing to honor the terms of the sublease as a direct lease between the landlord and subtenant if the lease is terminated. In many cases, however, this may be no more than wishful thinking on the subtenant's part, unless the subtenant has something that the landlord wants (e.g., a solvent source of rent if the tenant's financial position is shaky, a commitment to lease the subleased premises directly from the landlord after the expiration of the lease, or a commitment from the subtenant to significantly improve the subleased premises).

Even if such leverage is lacking, the subtenant should ask the landlord to (i) represent to it that the sublandlord is not currently in default of its obligations as tenant under the lease, (ii) notify the subtenant of any future default by the sublandlord under the lease, and (iii) give the subtenant an opportunity to cure the default (preferably with respect to the subleased premises only in order to preserve the subtenant's rights). It may also be important for some subtenants to know that the landlord will be obligated to provide certain services to the subleased premises to which the subtenant would not otherwise be entitled (e.g., janitorial services, parking rights, suite signage, or project directory listings). Any such obligations should be set forth in a writing that is signed by landlord for the subtenant's benefit.

Although space users may love sublease opportunities because of the below market rents and property managers may loathe subleases because of the competition and work they create, it is essential that each know and document their rights.

Ed Chanin practices in the areas of real estate and commercial law. He advises property owners and tenants on leasing and other real estate issues, including large-scale real estate transactions. Ed is a member of BOMA and is also a Real Property Law Specialist certified by the Minnesota State Bar Association.