A sublease is really no different than a lease other than its title and the use of different labels (subtenant instead of tenant; sublandlord instead of landlord; sublease instead of lease; etc.). It needs to convey an interest in real property and it needs to establish the contractual relationship between the subtenant and its sublandlord. One might think it to be “special” because it is constrained by a superior lease (master lease; overlease; etc.), but that’s not any different than a lease being constrained by a superior mortgage, a restrictive easement agreement, zoning laws, etc. In each case, the grantor (landlord or sublandlord) can’t give greater possessory rights than it, itself, has and can’t give any contractual rights that it has agreed (say in a mortgage) it won’t give or that the law won’t allow. Neither can a sublandlord.
But, there is an approach that crafters of subleases often use that is not available to crafters of leases. That’s by using an “incorporation by reference” form of sublease. [That’s not to say leases never incorporate parts of other documents by reference to those documents, references to laws being one example. And, its also not to say that there couldn’t be a publication with “standard lease terms” that might be incorporated by reference, as is done when requiring one party or the other to abide by ASTM, ASHRE or similar standards, just that, if that is being done out there, it’s a rare occurrence.]
What is an “incorporation by reference” type of sublease document? Basically, it is an approach that tries to say: “Take the underlying (master) lease and change landlord to sublandlord; change tenant to subtenant; change leased premises to subleased premises; make the subtenant look to the landlord of the underlying lease for everything that it needs from its own sublandlord (and cut the “middleman-sublandlord” out of the loop; make the subtenant abide by all of the rules and strictures printed in the underlying lease; and list all of the provisions of the underlying lease that are inapplicable to the sublease.
Why do it that way? – mostly because those who use this approach think its saves time. Ruminations doesn’t. That’s why they have to run the race.
One legal forms publisher offers a two page sublease form based on this approach. Of course, there are longer forms available that rely on this approach. Each includes the following “umbrella” concepts, though not necessarily in such detail:
X. This Sublease is subject and subordinate to the Master Lease, and to all leases, mortgages, and other matters to which the Master Lease is subject or subordinate. This provision will be self-operative but Subtenant, within 10 days after its receipt of Sublandlord’s written request therefor, will execute any instrument reasonably requested by Sublandlord or Master Landlord to evidence or confirm the same. Sublandlord represents that: (a) a true and complete copy of the Master Lease (excluding redacted terms and conditions not relevant to Subtenant) is attached hereto as Exhibit A; (b) Sublandlord is the tenant under the Master Lease; (c) the term of the Master Lease began on ____________; (d) the expiration date of the Master Lease is _________; (e) the Master Lease is in full force and effect; (f) to the best of Sublandlord’s knowledge, Sublandlord is not in default under the Master Lease; and (g) Sublandlord has not received any notice of default under the Master Lease, except for any defaults which Sublandlord has cured and Master Landlord is no longer claiming to exist.
Sublandlord will not voluntarily terminate the Master Lease except pursuant to a right of termination arising out of casualty or condemnation expressly set forth in the Master Lease, and Sublandlord will not amend the Master Lease in a manner adverse to Subtenant in any material respect. If the Master Lease is terminated for any reason, this Sublease will also terminate. Sublandlord will not be liable for any such termination unless such termination: (a) arises out of a default under the Master Lease by Sublandlord, where such default did not arise out of a default hereunder by Subtenant; or (b) had been effectuated by Sublandlord in violation of this Section X.
Y. Except as is otherwise expressly provided in, or is otherwise inconsistent with, this Sublease, and except to the extent not applicable to the Subleased Premises, the Incorporated Provisions are hereby incorporated in this Sublease by reference with the same force and effect as if set forth herein, except that, unless the context requires otherwise:
(a) references in such provisions to Owner, Landlord or Lessor are deemed to refer to Sublandlord;
(b) references in such provisions to Tenant or Lessee are deemed to refer to Subtenant;
(c) references in such provisions to the Premises or the Demised Premises are deemed to refer to the Subleased Premises;
(d) references in such provisions to other provisions of the Master Lease that are not incorporated herein are to be disregarded; and
(e) references in such provisions to subleases, sublettings or subtenants are to be deemed to refer to subsubleases, subsublettings or subsubtenants.
Z. Sublandlord is not deemed to have made any representation made by Master Landlord in any of the Incorporated Provisions. Moreover, Sublandlord is not obligated:
(a) to provide any of the services or utilities that Master Landlord has agreed in the Master Lease to provide;
(b) to make any of the repairs or restorations that Master Landlord has agreed in the Master Lease to make;
(c) to comply with any laws or requirements of public authorities with which Master Landlord has agreed in the Master Lease to comply; or
(d) to take any action with respect to the operation, administration or control of the Building or any of its public or common areas that the Master Landlord has agreed in the Master Lease to take,
(all the foregoing being herein called the “Building Services”) and Sublandlord will have no liability to Subtenant on account of any failure of Master Landlord to do so, or on account of any failure by Master Landlord to observe or perform any of the terms, covenants or conditions of the Master Lease required to be observed or performed by Master Landlord.
[Adapted from the 2012 revision of the Form of Sublease originally prepared by the Committee on Real Property Law of the Association of the Bar of the City of New York. See: www.nycbar.org.]
At the mid-set of today’s posting, and in the interest of full disclosure, Ruminations does not endorse or recommend the use of “incorporation by reference” subleases. We don’t believe they save any meaningful time and think their use results in inferior, incomplete agreements. Ours, however, may be a minority view, and that’s why we are pressing on with today’s posting.
There is no substitute for approaching the drafting process as if engaged in some form of virtual reality. Anyone preparing a sublease that relies on “incorporation by reference” needs to “walk” through every provision of the master lease (and every provision of the sublease) as if she or he were: first, the subtenant; then, the sublandlord; and then, the master landlord, along the way, always asking: “How do the ‘converted’ provisions work?”
If one does that, she or he will realize that there are three categories of provisions encountered during the virtual reality walk. They are: (a) the provisions to be excluded; (b) the provisions that “kind of work,” but need to be modified; and, the largest category, (c) the provisions not in the master lease that ought to be in the sublease.
Today, we’re only going to make lists, not explain possible approaches to the listed items. That’s one way we’ve been able to have grist for the mill, this being our 170th blog posting – saving “stuff” for later postings.
WHAT PROVISIONS WOULD TYPICALLY BE EXCLUDED?
- Rent (Base)
- Assignment and Subletting (or they might be changed)
- Right to self-insure
- Renewal Options
- Cancellation or kick-out rights
- Expansion rights
- Rights of first refusal
- Tenant allowances
- Rebates to tenant
WHAT PROVISIONS WOULD TYPICALLY BE CHANGED?
- Definition of Lease Term – when it starts and when it ends
- Delivery condition
- Percentage Rent
- Use clause (to limit or narrow it)
- Alteration and improvement rights
- Default periods (as to the Subtenant, to shorten them)
- Notice and other time periods (some shortened and some lengthened)
- Rights based on damage and destruction (especially retaining Sublandlord’s right to terminate and denying those rights to Subtenant)
- Rights based on eminent domain (especially retaining Sublandlord’s right to terminate and to receive proceeds and denying those rights to Subtenant)
- Environmental provisions (for the Subtenant’s particular use)
- Those where the Sublandlord has negotiated extremely favorable rights based on its own bargaining power)
- Default remedies provisions (e.g., conditional limitation vs. eviction action)
WHAT PROVISIONS WOULD TYPICALLY BE ADDED?
- Sublandlord’s sole obligation is to pay rent and additional rent to the Master Landlord
- Subtenant needs to give copies of notices it receives to Sublandlord
- Subtenant’s desire that Sublandlord try to get a recognition agreement
- Obligations that the Master Lease says the Sublandlord (as tenant) has to perform, are to be performed by Subtenant
- Where the Sublease would imply that the Sublandlord under the name substitution construction is obligated to act as if it were the Master Landlord under the Master Lease, the Sublandlord’s sole obligation is to try to get the Master Landlord to do what the Master Lease requires
- At some point in time, Subtenant can cure Sublandlord’s defaults under the Lease
- No rent abatement for anything
- No further subleasing
- No assignment of Sublease
- No use by others
- Indemnity provisions as between Sublandlord and Subtenant
- Subtenant is to indemnify Master Landlord
- Rent to Sublandlord
- Additional Rent to Sublandlord
- Late Charge
- If Master Landlord withholds its consent, Sublandlord isn’t unreasonable if it withholds its consent
- Only an injunction can be sought as the remedy for failure to get consent
- Notice provision as between Sublandlord and Subtenant
- Security deposit payable to Sublandlord
- Insurance – different limits; different or extra additional insureds and loss payees
- Additional restrictions on alterations
- Sublandlord’s right, but not obligation to cure Subtenant’s defaults – no mitigation claims
- Brokerage provision for the Sublease itself
- Holdover provision and remedies for holdover (keeping in mind possible “expanded” damage to the Sublandlord)
- Individualized business terms
- Attached (redacted) Master Lease
- Allocation of parking spaces
- Adjusted pro rata shares
- Utility service sharing
- Rights as to terminating Master Lease or Sublease upon an event causing damage or destruction
- Barring Subtenant from using Subleased Premises for the stated (Subtenant’s) exclusive use
- Exculpation of Sublandlord
- Exclusive use right imposed by Sublandlord against Subtenant
As always, Ruminations invites suggestions from its readers, this time as to other sublease provisions that might be wise to consider when “doing” an “incorporation by reference”-style sublease. Just add your comments below.