Considering a sublease? LOOK BOTH WAYS!

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I recently assisted a client that is a commercial tenant with extra square footage by reviewing a proposed sublease of the extra space to a prospective subtenant. It was a good opportunity to once again think about the best way to structure such an arrangement and the risks involved, particularly for the tenant (my client) that will now be “sandwiched” between their landlord under their own master lease and their subtenant under their new sublease. Most importantly, it reminded me that in these situations the tenant must LOOK BOTH WAYS before stepping out into “Sublease Street” because now they are taking on risk in both directions, “left” as tenant under the master lease and “right” as sub-landlord under the new sublease.

In these situations, it is very important to review both the master lease, to ensure that subletting is permitted and, if permitted, under what circumstances and conditions, and the sublease, to ensure that the sublease meets all the conditions of the master lease and that it is an acceptable and enforceable lease in it’s own right as between the tenant and subtenant. Balancing the requirements of all the parties (landlord, tenant and subtenant) is complicated business!

look_both_waysI’ve seen subleases done two ways: One, as a stand-alone lease between tenant and subtenant that does not incorporate the master lease, or two, as a lease between tenant and subtenant that incorporates the master lease and thereby requires the subtenant to abide by all of the terms and conditions of the master lease. The proper structure in a commercial situation is usually method two, incorporating the master lease, because usually in a commercial situation the master lease imposes the obligation to do so, along with other conditions such as obtaining landlord’s prior consent. “Looking both ways” by reading both leases and making sure they are compatible (and, especially, that neither the sublease nor any of its terms results in a default by the tenant under the master lease) is the only way to know the proper way to move forward.

Because several parties with opposing needs are involved, subleasing can be tricky business, so looking both ways is critical for the tenant in the middle of the arrangement. Hire a highly qualified commercial real estate attorney (hey, maybe that’s me!) to draft or, at minimum, review the proposed documents and helping you LOOK BOTH WAYS.

As always, thanks for reading! BH

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