Many landlords who are approached by one of their tenants with a proposed sublease that looks advantageous to all involved can have a reflexive instinct to accept the negotiated sublease terms and incorporate the Master Lease terms into the sublease as guide to their new occupant. Although incorporating the Master Lease has its advantages, it often pays dividends to review and reflect on what the subtenant is proposing in order to :
1. avoid negating the obligations of the existing tenant;
2. properly reflect the responsibilities of tenant and subtenant; and
3. create enforcement mechanisms as to the subtenant if there is a default by either party.
At a minimum, the Sublease should reflect that the tenant remains directly responsible to the landlord for certain basic obligations and responsibilities such as the lease term, who pays rent to whom, options available to the tenant and/or subtenant, notice requirements, use restrictions, condemnation rights, further rights of assignment and reversion, remedies upon default, holdover, excess rent payments received by tenant from subtenant, and bankruptcy filings by any party. Often, these issues are not contemplated by the Master Lease.
To avoid the headaches and potential problems associated with a sublease to a third party, landlords should insure that the sublease agreement makes clear:
A. that the tenant will remain primarily responsible for any subtenant defaults regardless of any agreement between tenant and subtenant;
B. subtenant has no rights that exceed those granted the tenant, including but not limited to options to extend the lease, alterations and use restrictions;
C. subtenant has no further right to assign or sublease the premises without the express written consent of landlord;
D. rent should be paid to the tenant and any rent received by tenant that exceeds the contract amount should be divided among landlord and tenant according to a specific set of procedures; and
E. in the event of a subtenant default, landlord retains the right to reclaim possession of the premises by due process of law without consent of the subtenant.
If the tenant or subtenant files bankruptcy, the issues of possession and collection of past due rent and damages fall under the long arm of the Bankruptcy Code and associated case law. However, the more the sublease has been drafted and approved to reflect that the rights the landlord are primary, the better the result.
This is a synopsis of some of the many problems that could arise if a subtenancy is created and consent guidance is given only by the terms of the Master Lease. Due care and attention to the details of the transaction is key.