list for Avoiding Uncertainty being a Subtenant

When subleasing office space for your company, the devil is in details. Subtenants who are savvy should take advantage of the discounted rates and free furniture and be aware of potential problems that may arise in the future.

Based on my experiences as a sole tenant representative, these are the 12 risks you and your realty attorney should evaluate and mitigate before signing any sublease agreement or lease assignment agreement to occupy another person's workspace.

Determine the Sublandlords Financial Stability

It is crucial to do proper due diligence and assess the financial stability and ability of the sublandlord. A sublease agreement that doesn't have these factors might not be worth the printed paper.

If the sublandlord owns a private entity, the subtenant may need to request and review financial statements from the sublandlord. Therefore, you should be ready to present your financial statements to the master landlord and sublandlord as a potential tenant.

If the sublandlord or tenant cannot afford the full rent, your lease opportunity will likely end soon. Worse, you may be given notice by the master landlord that the building must be vacated or the market rental rates.

Prevent a Buyout of Master Lease By the Sublandlord

This is a huge "gotcha" as it's at sublease foundation. The subtenant should not permit termination or cancellation of the master leasing agreement, even via a future lease purchase-out between sublandlords and master landlords. This would also mean that the sublease would be terminated. Instead, the subtenant should ask the sublandlord in the sublease agreement to waive a termination, cancellation, or lease buyout with the master landlord unless the subtenant approves it in writing.

It is important to determine as soon as possible whether a lease buyout is really the sublandlord's intention. You might not be making the right decision by pursuing this space. A lease buyout is possible in certain situations, particularly if you are looking for a "subsidized direct lease" with a landlord. Why? The landlord might be able to subsist on your direct lease by paying cash from the lease buyout. This could include rent concessions or a higher tenant improvements allowance.

Do Not Agree to Everything in The Master Lease

You cannot change the master lease of the tenant/sublandlord as a prospective subtenant. However, you don't have to agree to all terms in the master lease. You can leave some obligations from the master lease to your sublandlord and still accept them as subtenants. You will need to negotiate with the sublease agreement to exempt the subtenant of any unacceptable provisions in the master lease.

Don't agree to restore tenant improvements to "Original Conditions"

As the subtenant, be careful not to agree to restore your sublandlord's original tenant improvements to their "original condition." This refers to the condition in which the sublandlord first signed its master lease. Subleases are usually done on an "as is, where-is" basis. This can lead to costly mistakes in the end. If it is applicable, that obligation should be left with the tenant/sublandlord and not with you.

"Licensing" Use of Existing IT Network Cabling

Many landlords require tenants to remove any IT network cables above the ceiling when moving out of leased office spaces. This is to ensure that there are no fire hazards and that the cables don't become a mess that can be costly for the landlord. If you plan to re-use the sublandlord's IT network cabling within the sublease premises, you will need to negotiate a "license" to use it during the term. You should not agree to any "transfer of ownership" of or "sale of" the IT cabling. Otherwise, you could be stuck with a huge bill to take out all IT cabling after the term ends.

Don't Agree To All the Master Landlords Remedies For Defaults

A section in the sublandlord's master lease usually refers to the landlord's remedies in the case of default by the tenant. You should carefully read the landlord's remedies and be aware that the sublandlord may not have the exact same rights as you. It might be necessary to exempt the subtenant from certain landlord remedies as noted in the master leasing agreement. These remedies should only be applicable to the master landlord/tenant.

The subtenant shouldn't be required to pay the master landlord for any unamortized improvements made for the tenant/sublandlord. This applies to any free rent or moving allowance that the landlord may receive due to defaulting on the master lease. These costs could be quite costly, and the subtenant should not have to pay them.

Remain in Sublease Premises

If the master lease is terminated or canceled, the master landlord must consent to the sublease.

The first question you might ask is, "What would the subtenant's rent rates be if the master leasing ended?" There are many options. The rates could remain the same or be modified based on new rates negotiated at "then fair rental rates" at the time of termination.

If negotiated rates are being offered, the subtenant should have them paired up with the "baseball approach" to arbitration. This is in case the master landlord and subtenant cannot agree on the fair market rental rates. The baseball method of arbitration would make it a "winner takes everything" situation. An arbitrator would choose either the master landlord or the subtenant's rental rates. This would usually be without any averaging between the rental rates.

Sub-Sublease Space

You should try to negotiate the rights to sublease or reassign sublease premises (including some of them) to a successor assignee or subtenant. Unfortunately, this is not always possible. Even if you win the provision, you will likely still need to get written consent from the sublandlord. You or your real estate lawyer should ensure that the consents in the sublease agreement and master landlord's consent are not withheld, delayed, or conditioned by the other side.

It's a good idea for a sub-sublease agreement to indicate the time that the master landlord and sublandlord must give written consent. Each sublandlord and master landlord should be given a 5-day deadline. I would recommend allowing for ten business days. If you give too much time, your sub-subtenant could end up in court.

Sub-sublease rights can be hard to manage in a sublease agreement, so I wouldn't recommend it as a "dealbreaker."

Retain Sublandlords' Rights to Renew and Expand

We have not tried to minimize the risk of this situation. A subtenant who is very creditworthy and attractive might be able to convince the master landlord not to terminate the tenant/sublandlords rights to renew or expand. These rights are usually lost when there is a sublease, assignment, or change in control. A master landlord might waive its rights under the master lease if the subtenant/assignee is a larger, more creditworthy entity than the tenant/sublandlord.

Remove Future Conflict over Tenant Improvements

This risk can be very real, no matter how technical it might seem. Let's suppose that both the master lease and sublease expire. The subtenant would like to stay in the sublease premises but sign a new lease with the master landlord. What happens to tenant improvements that the subtenant would like to keep? What is the next step if the master lease requires the tenant/sublandlord to restore the premises to their "original condition"?

This should be addressed in the sublease agreement or the landlord's consent. You, as the subtenant, shouldn't wait for the expiration of your master lease to resolve the conflict in your favor.

Get Rights to Cure Sublandlords Defaults and Self Help

Subtenants should try to get rights to remedy defaults in the master lease by tenant/sublandlord. This also requires that the subtenant receive timely written notice from the master landlord about any default by tenant/sublandlord. However, this does not address the important aspect of curing sublandlords' defaults under the master lease. That is, how would the sublandlord repay the subtenant? To make the subtenant whole, it is important to have a reimbursement provision in addition to the notice provision.

The subtenant should seek self-help as part of its rights for cure in order to reduce this risk. The subtenant can then perform the necessary repair or remedial work, and then the sublandlord will reimburse the subtenant for reasonable expenses. Although it is difficult or common to obtain a right to self-help, it should be easier for subtenants than direct tenants dealing with landlords. For example, a subtenant may not be able to subtract from the sublease rent. Instead, the subtenant might need to negotiate a different process to get reimbursed by the landlord for the cure of the sublandlord's default under the master lease.

Negotiate a Higher Liability Limit for Sublandlords' Indemnification

You should carefully review the "indemnification clause" in the master leasing agreement to see what the subtenant's rights would be in the case of default by the tenant/sublandlord. For example, a master lease would typically limit the master tenant's liability exposure to master landlords' "interest in the property." This means that the master landlord has equity value in the property.

This means that if the same provision is passed through to the subtenant's sublease agreement, it would also apply in the event of default by the sublandlord. If this is the case, a subtenant would only be able to sue its sublandlord for the "sublandlord's interest in the property" if this is the case. The sublandlord would have to pay the master lease, which is almost worthless. The subtenant should negotiate a lower liability limit with the sublandlord as part of the sublease agreement.