A Primer on Subleases
 
July 17, 2001
 

A tenant's sublease to a new tenant of an office, shopping center or other premises is often beneficial to the original tenant, the new tenant and the landlord of the premises. If the sublease document properly addresses the unique relationship of these parties, it is more likely that the sublease arrangement will remain beneficial after execution of the sublease.

Sublease Benefits

A tenant (the prime lessee) that has signed a lease for a term of years remains liable on its obligations under the lease (the prime lease) even if it does not remain in possession of the premises. If the prime lessee is unable to use the premises, it will often seek to sublease the premises (the sublease) to a new tenant (the sublessee). The sublease does not release the prime lessee from its obligations to the landlord (the prime lessor) under the prime lease. However, it relieves some of the sublessee's burden because the sublessee becomes obligated to the prime lessee to discharge the prime lease obligations in whole or in part.

The prime lessor usually must consent to the sublease. However, it will often grant the consent since (1) the prime lessee remains obligated to the prime landlord under the prime lease, (2) the sublessee keeps the premises from becoming vacant and assists the prime lessee in meeting its obligations under the prime lease, and (3) the prime lessor avoids the expense of enforcing the prime lessee's obligations under the prime lease.

The sublease may also be beneficial for the sublessee. Due to market conditions, reduced negotiating leverage of the sublessor and other reasons, the sublease terms could be more favorable than leases for vacant space currently on the market. The sublease premises may also be uniquely suited to meet the sublessee's needs.

Relationship Between Prime Lessee, Sublessee and Prime Lessor

Despite the sublessee's possession of the premises pursuant to the sublease, the sublessee generally cannot enforce the obligations of the prime lease or the sublease against the prime lessor. The prime lessor, in turn, generally cannot enforce the obligations of the prime lease or the sublease against the sublessee. Note, however, that the sublease is subject to the prime lease, and the sublessee is generally charged with knowledge of the prime lease terms such as the prime lease expiration date.

While the prime lessee is not in possession of the premises, it is the essential intermediary between the prime lessor and the sublessee. The prime lessee remains liable to the prime lessor for the obligations of the prime lease, and the prime lessee is responsible for the acts and omissions of its sublessee. Further, the sublease creates a landlord and tenant relationship between the prime lessee and the sublessee, and the sublessee must look to the prime lessee to enforce the obligations of the prime lessor under the prime lease.

The Sublease

When preparing the sublease and the prime lessor's consent to the sublease (the prime lessor consent), the parties must properly address this unique relationship of the parties, and negotiate provisions in the sublease that protect their interests. The scope of this article does not allow a complete discussion of all such provisions. However, some examples are identified below.

The sublessee's continued use of the premises under the sublease is dependant on the prime lessee's performance of the covenants of the prime lease. The sublessee should therefore negotiate sublease provisions that require the prime lessee to timely pay rent and otherwise perform all covenants of the prime lease that do not require for their performance possession of the premises (for example, maintenance of tenant insurance required under the prime lease). Because it cannot directly enforce against the prime lessor the prime lessor's obligations under the sublease, the sublessee should also require the prime lessee to enforce the prime lessors obligations under the prime lease on behalf of the sublessee.

The prime lessee, on the other hand, should attempt to limit its responsibility and liability for those services, repairs and other obligations required of the prime lessor under the prime lease. For example, the prime lessee should require the sublessee to pay all of the prime lessee's costs and expenses incurred in enforcing the obligations of the prime lessor under the prime lease on behalf of the sublessee. The prime lessee should also protect its interest in the prime lease by requiring the sublessee to comply with the covenants of the prime lease that are by their nature imposed upon the party in possession of the premises (for example, compliance with the use provisions of the prime lease), and the prime lessee should have a right to enter and cure any default by sublessee.

In order to retain the benefit of having the prime lease remain in existence and the prime lessee liable under the prime lease, the prime lessor should confirm in the prime lessor's consent that the sublease and the prime lessor's consent do not create privity of contract between prime lessor and do not constitute an amendment to the prime lease. The prime lessor should also confirm that the prime lessor consent does not constitute a waiver of any prime lessor right to consent to any further assignment, sublease or other transfer of the premises by prime lessee or sublessee.

Conclusion

The sublease creates a unique relationship between the prime lessor, the prime lessee and the sublessee. A properly prepared sublease can address this relationship in a manner that allows for efficient negotiations between the parties, protection of their respective interests and preservation of the benefits of the relationship after execution of the sublease.