What concerns would a landlord have with its tenant entering into an otherwise acceptable sublease? It isn’t our intention to hypothesize about a landlord’s legitimate concerns about the transaction itself, but only over its details. For today’s posting, we’re assuming that the landlord is consenting to the sublease, but is that the end of the story? We think not.
Fundamentally, absent some agreement between a property-owning landlord and its own tenant’s subtenant, there is no privity of contract between the landlord and the subtenant. Basically, the landlord can’t sue the subtenant for breach of the Master Lease or for breach of the Sublease. They are not parties to the same agreement. That doesn’t mean that a landlord has no recourse against a subtenant. It might. But that would arise out of a tortious act or omission by the subtenant or might arise out of a statute. [Also, and without elaboration, the is no privity of estate either (whatever that is).] So, in the purest sense, a landlord might want to completely ignore the subtenant’s presence and deal solely with the tenant with whom it has joined in a lease. Let the subtenant be its tenant’s problem. If the subtenant mucks up the place, hold the tenant responsible.
Conventionally, that never happens. So, what can and does happen? Answer: the landlord’s written consent document goes to 10 pages beyond where it says, “I consent.” Here are some of the items and issues you can expect to see on those pages.
[Read: “except as expressly set forth in the Consent document” into each of the listed issues.]
- Will there be a guarantor for the subtenant’s obligations to the Tenant-Sublandlord and will the (actual, property owning) Master Landlord be a beneficiary of that guaranty?
- It would say that nothing in the Sublease modifies, waives, impairs or affects any provision of the Master Lease (the one between the Master Landlord and the Tenant-Sublandlord) and that the Master Lease remains in full force and effect.
- Neither the consent nor the Sublease enlarges or increase the Master Landlord’s obligations or diminish or decrease the Master Landlord’s rights under the Master Lease.
- The Master Landlord’s consent does not serve as a waiver of forgiveness of any breach or default by the Tenant-Sublandlord.
- None of the terms of any Guaranty of the Tenant-Sublandlord’s obligations to the Master Landlord are modified, waived, impaired or affected by the Master Landlord’s consent and no Guarantor is released. This means that the Guarantor(s) should be signing the Consent document.
- There is to be no further subletting by the Subtenant and the Subtenant will have no right to assign its interest in the Sublease.
- The Master Landlord’s consent is only for the subject transaction and no inference should be made that the Master Landlord is obligated to apply the same consent criteria to any later subletting by the Tenant-Sublandlord to the same Subtenant or to any other subtenant.
- The Tenant-Sublandlord remains primarily and directly responsible for all of the Tenant-Sublandlord’s obligations under the Master Lease, including as to any expressed Master Lease modifications that might be embedded in the Consent document. The Master Landlord need not go to the Subtenant first or at all.
- There would be a reaffirmation that the Sublease is subject and subordinate, at all times, to the Master Lease and that the Subtenant may not do anything, permit anything or suffer anything that would be a violation of the Master Lease. [This can give the Landlord a direct cause of action against the Subtenant.]
- The Master Landlord is not responsible in any way for real estate brokers’ commissions arising out of the Sublease or the subleasing transaction or the subleasing negotiations. Both the Tenant-Sublandlord and the Subtenant should be indemnifying the Master Landlord in that regard.
- At the expiration or sooner termination of the Master Lease’s term, the Subtenant is to have no right to remain in the leased premises and, consistent with state law, the Master Landlord should have direct “removal” and “damage” remedies against the Subtenant.
- If the Master Lease is prematurely terminated, the Master Landlord has the option of requiring, but no obligation to permit, the Subtenant to become the Master Landlord’s direct tenant. This is tricky and complicated. Ruminations will not elaborate. For example, the Master Lease may have been rejected in bankruptcy and a new, identical lease with the Subtenant might be needed. Also, the Master Landlord won’t want to be obligated for what the Tenant-Sublandlord previously did wrong to the Subtenant.
- A true and complete copy of the Sublease should be attached to the Consent document and no modifications to the Sublease may be made without first obtaining the Master Landlord’s written consent and no waivers are to be given by the Tenant-Sublandlord without the Master Landlord’s written consent.
- The Master Landlord is absolutely not a party to the Sublease and is not bound by any of its provisions.
- The Tenant- Sublandlord and the Subtenant are to represent that no consideration is being paid to the Tenant-Sublandlord by anyone in connection with the subleasing transaction other than what is set forth in the Sublease.
- The Subtenant is solely responsible for obtaining all other needed approvals, governmental or otherwise and the Master Landlord has no obligation to perform any work of any kind in connection with the Subtenant’s attempt to obtain those approvals.
- The Subtenant should be required to furnish the Master Landlord with estoppel certificates and those should inure to the benefit of the Master Landlord, prospective purchaser, current lenders, and prospective lenders.
- The Tenant-Sublandlord and the Subtenant should be required to copy the Master Landlord on any default notices sent one to the other.
- The Tenant-Sublandlord should confirm that the Master Landlord is in compliance with the Master Lease and that there is nothing that, but for the passage of time, would constitute a default by the Master Landlord.
- The Subtenant should acknowledge the Master Landlord’s Lease rights to enter the premises.
- The Subtenant’s liability insurance should name the Master Landlord as an additional insured and the Subtenant should waive property damage claims as against the Master Landlord, with appropriate waiver of subrogation provisions in the Subtenant’s property insurance policies.
- The Subtenant should acknowledge that none of the Master Landlord’s insurance polices, whether property or liability, are for the benefit of the Subtenant and that the Subtenant will have no coverage under them.
- The Subtenant should waive all property damage claims against the Master Landlord if they arise out of water, dust, etc. intrusion into the premises, regardless of cause, or if they result from any leaks or transference from pipes, conduits, etc. within the premises. The actual list of “possible bad things” can be long, but there are a lot of standard reference works that can help the reader out here.
- Payments made by the Subtenant to the Master Landlord on behalf of the Tenant-Sublandlord are not to be considered as a factor if the Subtenant ever claims that is has become the Master Landlord’s direct tenant.
- The Master Landlord should consider adding a standard “exculpation” provision to the consent document as between it and the Subtenant.
[How’s that list for you “give us forms” readers?]