Negotiation Tips When Subleasing Commercial Real Estate

negotiating commercial real estate subleases

Commercial real estate subleases can be great in that you are typically able to lock in below market rental rates, shorter lease terms, and free furniture, however negotiating commercial real estate subleases can be tricky if you don't know what you are doing.

Negotiating the basic sublease terms is the easy part, but because most commercial sublease contracts are tied to the original master lease between the tenant and landlord it's important that you and your attorney carefully review that before signing any sublease contract. Below are a few things to consider before signing a commercial sublease contract.

(Note: In a sublease transaction the company wanting to sublease the space is the Subtenant, the company that currently leases the space would be the Tenant or Sublandlord, and the building owner is the Landlord)

Financials

Just like a Landlord or Subllandlord would want to review the Subtenants financials to ensure that they can afford to pay the rent, it's important that the Subtenant review the Sublandlord's financials. The reason is that in most leases if the Sublandlord defaults because they don't pay rent then the landlord can lock the doors and ask you to move out. You won't have any rights to stay. You need to make sure that the Sublandlord is financial sound. There are no guarantees however it will help mitigate your risks.

Restoration Clauses

Negotiate to avoid having to restore the space to it's original condition. Many leases or subleases have a restoration clause. Be sure to include in your proposal for the subtenant to not be required to remove any of the original tenant improvements or restore or remove any subsequent alterations or improvements allowed to be made by Subtenant. The same goes for phone and data cabling. In most leases tenants are required to remove the data cabling on or before they move out of the space. Removing cabling can be expensive so Subtenants want to avoid this if at all possible and ensure that they are only “using” the existing cabling and not be responsible for removing after the sublease expires.

Landlord Consent & Recognition & Subtenant Attornment

With any sublease between a Subtenant and Sublandlord the Landlord (aka building owner) has final approval. This is usually stated in the Master Lease, and the terms and conditions of the consent is on a Landlord Consent to Sublease document that is attached to the sublease contract.

If you are the Subtenant you want to also negotiate with the Landlord the right to occupy and lease the space in the event the Sublandlord defaults (e.g. does not pay rent, goes bankrupt, etc…). The termination of the lease by Landlord should not terminate the sublease, nor shall the Landlord disturb the Subtenants use and possession of the space.

Additionally the Subtenant would have to Attorn to Landlord, which means the Subtenants obligations (e.g. to pay rent) are transferred to the Landlord.

Without the landlord's recognition, if the Sublandlord defaults and the master lease is cancelled, the sublease would not continue in full force and effectand the Subtenant would have to move out of the space.

If the master lease is terminated for whatever reason the Landlord and Subtenant could create a new lease or continue the sublease. In any case the Subtenant needs to ensure that the the terms of the sublease remain the same.

Right to Sub-Sublease

Just because the original lease has a sublease / assignment clause that does not mean the sublease / assignment right conveys to the Subtenant.

The Subtenant needs to negotiate the right to sublease themselves in the event they need to dispose of the space. This might not be possible however you need to seek it when possible. The sublease option would have to be approved by both the Sublandlord and Landlord.

Make sure to specify the time allowed that all parties have to consent or disapprove. If you let too much time go by you risk killing the deal.

Watch Out For Landlord Recapture Clauses

Before you spend too much time trying to negotiate a commercial sublease make sure to read the master lease to see if there is a landlord recapture clause. If there is then you need to call the Landlord to see what their intentions are as well as the other tenants in the building.

You see with a recapture clause the Landlord could take back the space anytime they want. It doesn't matter where you are in the sublease negotiation process, even if you are about to sign it.

If another tenant in the building tells the Landlord that they need more space the Landlord can recapture the space and lease to them.

Make sure you have other options on the table, and you need to understand that this could happen no matter how much due diligence you do.

Sublandlord Lease Buyouts with Landlord

Again as soon as you can get a copy of the master lease and read it. If you see the Sublandlord has a buyout option date sometime after you sign the sublease you could be at risk.

It's important that you negotiate to have the buyout option removed. That way your sublease will continue in full force and effect to the expiration date.

The Master Lease is Negotiable

Contrary to what they say you can negotiate the master lease. You will frequently here that everything reverts to the master lease and that NOTHING on the master lease can be altered.

There are some things that can't be changed however sometimes certain provisions are unacceptable to a Subtenant. Most Landlords are reasonable and don't want to see Sublandlords suffer so depending on what it is they may be negotiable.

It goes back to “you never get what you don't ask for”. And if the Sublandlord really wants to sublease the space they will work with you to persuade the Landlord.

Default Remedies For Sublandlord (AKA Tenant)

Every master lease has a section about Default remedies in. That basically defines what the Landlords has the ability to legally do if you don't pay rent for example.

However not every Landlord remedy should apply to the Subtenant as it does for the Sublandlord. I mean there are certain things that the Subtenant should not be liable for in the event of a Tenant default.

For example the Subtenant should not be responsible for paying back the landlord unamortized tenant improvements or free rent that the Sublandlord received.

Renewal and Expansion Options

These don't typically convey to a Subtenant however that does not mean you shouldn't ask for it. If you have great credit and a good track record then it's worth trying to get these concessions.

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