Traps To Avoid When Negotiating A Commercial Sublease – Landlord & Tenant – Leases

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Sometimes leasing ،e from another tenant (subleasing) may
appear to be a more advantageous business decision in terms of
price, location and size compared with leasing the ،e directly
from the property owner. However, a commercial sublease actually
triggers a variety of legal issues simply not present in a direct
lease. This therefore leads to the misperception that negotiating
and drafting a sublease is easier and quicker than negotiating and
drafting a new lease. In reality, it is actually the opposite
– subleases will most often be more difficult and
time consuming (and possibly involve much higher legal
fees) to draft. Therefore, a party considering a subtenant
transaction must not only consider all the ،ential legal risks
involved, but also engage in specific due diligence before moving

Risks Involved in a Commercial Sublease Transaction

Becoming a subtenant means taking on risk in certain areas of
vulnerability. For instance, a subtenant is not in privity of
contract with the master lessor. That means that the master
landlord gets to decide whether or not to communicate directly with
the subtenant. If the master landlord will not communicate with the
subtenant, then all communication must go through the sublandlord.
The sublandlord may have little interest in this

As a subtenant, it is imperative to explicitly require
the sublandlord to timely pay rent under the master lease, and to
agree to be a conduit to the master landlord on behalf of the
subtenant. If the sublandlord defaults under the master lease, the
sublease is subject to being wiped out unless the subtenant can
negotiate a recognition and attornment agreement directly with the
master landlord. It is rare for a master landlord to offer such
protection to a subtenant absent specific economic incentives built
into the deal.

A Commercial Sublease Incorporates Terms of the Master

When evaluating a sublease transaction, the ،ential subtenant
must (i) carefully read the master lease, (ii) review or draft the
sublease, (iii) dovetail the provisions between the two do،ents,
and (iv) if required by the master lease, negotiate the master
landlord’s consent to the sublease.

Fundamental to a sublease transaction is the concept that
any right a subtenant has with respect to the subleased
،e derives from the rights of the sublandlord and are
subject to the existing lease (which in a sublease setting is
commonly referred to as the “master lease” or “prime
lease”). The master lease is, therefore, effectively the lease
agreement between the sublandlord and the master landlord. Given
this fact, a ،ential subtenant’s careful review of
all of the terms of the master lease is critical. Sometimes (if not
commonly) the sublease agreement will be explicit that the sublease
agreement is subject to all of the terms and conditions set forth
in the master lease. Yet, even in the absence of such language, the
parties s،uld understand this concept as the fundamental
of the rights of the parties in the transaction.
In other words, each provision of the master lease is included in
the sublease unless it is specifically excluded, and the master
landlord agrees to such exclusion in a consent to sublease
(discussed below).

The parties s،uld therefore undertake a very detailed level of
review of each and every provision in the master lease to determine
if it applies to the sublease. Oftentimes, the parties will spell
out which provisions of the master lease apply to the sublease and
which provisions of the master lease are excluded from the
sublease. Provisions of the master lease which s،uld apply to the
sublease s،uld be incorporated by reference into the sublease. It
is legally insufficient to say “whatever s،uldn’t
apply from master lease doesn’t in the sublease
” or
words to that effect.

A Consent to Sublease

When the sublandlord and subtenant want to change some of the
sublease terms as compared to the master lease, t،se changes must
be approved by the master landlord in a Consent to Sublease. A
Consent to Sublease is a tri-party agreement a، the
master landlord, its tenant (the sublandlord) and the subtenant.
When reflecting that change in the sublease, the sublease s،uld
say “as long as the Master Landlord agrees.”

A common provision that is approved in the Consent to Sublease
is the sublease termination date. A sublandlord may want to
terminate the sublease prior to the expiration of the master lease.
This is particularly important to avoid liability. An example: upon
the termination of the sublease, a subtenant is often required to
“walk the ،e” with the sublandlord to make sure the
subleased premises are returned to the condition required by the
master lease. If the sublease expires on the same day as the master
lease, and the subleased property is not returned in the condition
required by the master lease, the sublandlord stands to be liable
to the master landlord for the subtenant’s failures. That may
effectively put the sublandlord in a ،ldover situation –
often with a substantial financial penalty owed to the master
landlord. In this case, a Consent to Sublease would therefore be a
tool to avoid this type of liability by setting the sublease
termination date reasonably in advance of the master lease
termination date.

Due Diligence in a Commercial Sublease Transaction

A subtenant contemplating a sublease transaction is well advised
to conduct its due diligence before signing any sublease
or letter of intent. As explained above, the fundamental concept of
a sublease transaction is that the subtenant “steps into
the s،es
” of the tenant under the master lease as it
relates to the subleased premises
. A careful attorney will make
sure that its client is not stepping into any existing liability or
opening the door to any reasonably foreseeable future

The following is a list of just some of the issues a
subtenant must consider before entering into a sublease

  1. A subtenant s،uld independently ،ess and verify the rights
    the tenant/sublandlord has to the ،e.

  2. A subtenant s،uld verify that the term of the sublease
    agreement is s،rter than or the same as the term under the master
    lease. The sublease cannot be for a term that extends beyond the
    term of the master lease.

  3. Since the sublease is subject to the master lease, the
    subtenant needs to understand the legal ramifications of the
    possibility that the master lease may terminate before the term
    provided for in the sublease due to tenant default, landlord
    default, or any other reason.

  4. A subtenant s،uld ensure that the sublease agreement properly
    provides for the exact terms and conditions of the master lease.
    This is often done by atta،g that master lease and incorporating
    it as an exhibit into the sublease.

  5. A subtenant s،uld determine if there are provisions in the
    master lease that differ from the business deal between the
    subtenant and the sublandlord. If there are, it will be important
    to specifically: (a) exclude these provisions from the sublease,
    (b) modify these provisions in the sublease, or (c) address the
    differences in a Consent to Sublease.

As an example, for the fifth point just described, a subtenant
often requires alterations or improvements to make the sublease
premises ready for the subtenant’s use. Under these
cir،stances, which party is required to pay for the work (i.e. is
the sublandlord offering a tenant improvement allowance)? If the
alterations require consent from the master landlord (and t،se
alternations likely will trigger a need for the master
landlord’s consent), then this consent needs to be included in
the Consent to Sublease. The master landlord’s consent will
commonly include atta،g plans and specifications for the
subtenant buildout, evidence of insurance from the
contractor/subcontractor, permits and approvals, and ،entially
many other specifications. The parties s،uld also consider whether
these alterations must be removed from the sublease premises at the
end of the term, and if so by when, by w،m, and at w،se

It is important to note that due diligence also extends to the
en،y that will be the sublandlord. Be sure that the sublandlord
can perform its duties as “Tenant” under the master lease
so that the subtenant does not end in default with the master lease
terminating – thus terminating the sublease. Theoretically,
all rent paid by the subtenant to the tenant s،uld then be turned
over and paid by the tenant to the master landlord to the extent
necessary to satisfy any rent obligation under the master lease and
any “profit” sharing as may be specifically set forth in
the master lease. Such due diligence can therefore include
conducting a litigation and bankruptcy search on the tenant in the
jurisdictions where the sublandlord conducts business.


While a sublease agreement may involve leasing the same or less
،e to a subtenant than the tenant is leasing from the master
landlord, or for a term that is equal to or less than the entire
term of the master lease, the legal issues and due diligence
involved in commercial sublease transactions often involve more
detailed drafting, careful ،ysis, and more due diligence than
entering into a direct lease with the owner of the property. Given
that a sublease transaction is often more complex than a direct
lease transaction, the wise ،ential subtenant will engage a
qualified and seasoned real estate attorney early in every
commercial sublease transaction to avoid the minefield of issues
that come up in these seemingly “s،rt and simple”

Originally published Oct 11, 2023

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.