Subleasing is experiencing a boom across the country due to the economic impacts of the coronavirus pandemic. With many businesses shifting to remote work, and others rethinking how they use office space, the amount of commercial space available to sublease is at or near record highs. In Manhattan, for example, there is a record 18.6 million square feet of office space available, accounting for nearly 27% of all office space.
While many issues may arise, below are 10 things that every business should know about subleasing, whether they are a sub-landlord or a sub-tenant:
(1) Likely Requires Landlord Consent
Before subleasing, it is important to review whether it is permitted under the prime lease. In most instances, the landlord's consent is required for any sublease, and many landlords will ask to see the negotiated sublease before giving such consent.
(2) Recapture Provisions Can Risk Main Lease
Under some lease provisions, the landlord has a right to terminate a portion, or possibly the entire, primary lease in response to a tenant's request to sublease. Caution is strongly advised.
(3) Excess Profits May Flow To Landlord
In areas where rental prices are increasing, businesses may look at subleasing as an opportunity to take advantage of their low rent to make a profit. However, many leases contain lease provisions that entitle the landlord to any excess profits from a sublease.
(4) Subleasing Gives More Control Than Assignment
Unlike assignments, in which the tenant surrenders its rights, a sublease allows the original tenant to retain control over the premises. This can allow a tenant to perform under the prime lease if the subtenant does not, and to enforce its rights against the prime landlord when necessary.
(5) Sublease Is Subordinate To Prime Lease
A sublease is always subordinate to the prime lease, i.e. if the prime lease is terminated, the sublease will terminate as well. As such, a subtenant should seek the right to cure breaches by the prime tenant to avoid possible termination.
(6) Recognition Agreement Can Create Relationship Between Prime Landlord And Sub-Tenant
A recognition agreement is a direct agreement between the prime landlord and sub-tenant where the prime landlord agrees to recognize the sub-tenant's right to occupy the premises and agrees not to extinguish such right if the prime lease terminates so long as the sub-tenant agrees to be bound by the terms of the prime lease. This can provide a valuable level of comfort for a concerned sub-tenant.
(7) Modifications To Prime Lease Can Impact Sublease
If the prime lease is incorporated by reference into a sublease, any changes to the prime lease will also affect the sub-tenant. As such, a sub-tenant should ensure that its consent is needed for any changes that would have a material impact.
(8) Partial Subleases Will Be More Complex
When a sublease only covers part of a premises, the parties will need to negotiate additional provisions that clearly delineate the parties' obligations, such as whether the prime landlord or sub-landlord is responsible for maintenance in the area occupied by the sub-tenant.
(9) Account For Potential Holdover
It is possible that holdover by the subtenant on a partial sublease could result in a holdover by the sub-landlord under the prime lease. As such, the sublease should provide that the sub-tenant's holdover liability be equal to or greater than sub-landlord's potential holdover liability.
(10) Don't Forget About The Lender
If the property is subject to a mortgage, the loan documents may have provisions addressing subleases and/or requiring the lender's consent. While not applicable under all loan documents, it should be a part of the parties' due diligence.
While these are some major issues to keep in mind when negotiating a sublease, the fact remains that a sublease can be as complex as the initial lease due to the additional parties and documents involved.