The offer to sublease
If the landlord’s consent to the proposed sublease is required (and it invariably is), the offer to sublease will need to be conditional on obtaining the landlord’s consent on terms acceptable to the tenant. The length of a sublease must be at least one day less than the expiry date of the head lease to avoid being deemed to be an assignment of the lease.
Historically speaking, the pros and cons of shorter versus longer lease terms were sometimes in conflict but the pandemic has actually created some alignment in this respect. Subtenants may want to opt for a shorter sublease term with multiple options to renew because this offers more flexibility in these uncertain times. From a tenant/sublandlord perspective, shorter leases are helpful when they already know that they’ll want space back because they’re anticipating growing their number of employees and want to secure space but don’t need it just yet.
“It’s important to expressly address things like whether the subtenant will have the right to require the tenant to enforce the landlord’s promises under the head lease (e.g. to do certain repairs), which tenant rights will flow through to the subtenant (e.g. parking, signage, options to renew, right to carry out alterations, etc.), and whether the make good provision or restoration obligations will be the responsibility of the tenant/sublandlord or subtenant.” — Laurie Sanderson (Partner, Gowling WLG)
A commercial lease’s make good provision is a clause that requires the leased premises to be restored to their original state at the end of the lease. Tenants are usually required to remove their property from the space, remove any alterations made to the premises and reinstate them to base building condition, and generally leave the area clean and tidy.
Subtenants need to carefully consider what, if any, of the existing alterations they are prepared to be responsible to remove and reinstate at the end of the sublease term. If this obligation is not to be passed on to the subtenant, then the tenant will need to adjust the term of the sublease to make sure they’ll have enough time to take back the space and restore it before their lease term expires.
The sublease itself
It is not uncommon to see the same terms and conditions flow through from the head lease to the sublease but using a lift and shift approach can sometimes cause issues. Laurie recommends preparing a redacted head lease. Why? It’s very difficult to retract a right that the subtenant has seen and been made aware of, even if it’s not really an option that’s being put on the table.
It’s better to engage on the grounds of what is possible and negotiate from there, instead of sharing with the subtenant lease provisions that the tenant/sublandlord or the landlord are not prepared to flow through to the subtenant. The sublease also needs to address all the things the tenant had been paying for themselves but will now be sharing with the subtenant (e.g. charges for reception, internet, cleaning, etc.).
Beyond working through the costs of everything, the subtenant will want to have the tenant confirm that the head lease is in good standing. In other words, the subtenant wants to make sure that no default has occurred, that there’s no deferred rent, or rent abatement that has to be repaid during the sublease term. The tenant turned landlord also wants to ensure they have the same type of remedies as the landlord but on a shorter timeline in the event that the subtenant defaults.
As a sublandlord, you need to have enough time to correct and cure the situation before it becomes a default under your head lease. Likewise, from a subtenant perspective, you may want to negotiate the right to pay the sublease rent directly to the landlord, especially given the landlord will, in most cases, require you to agree to be responsible for the tenant’s obligations under the head lease, including the payment of rent.
The overholding clause also needs to be considered. If the subtenant fails to vacate and surrender their sublet premises at the end of the sublease term, the landlord may treat the tenant as overholding on the entire premises. The sublease should deal with this aspect since you want to ensure the party responsible for overholding is responsible for the penalty for doing so.
“If you have a subtenant that’s subleasing 20% of the tenant’s space and triggers an overholding, the landlord will treat the tenant as overholding on 100% of the tenant’s space. As the tenant, you are likely responsible for paying double rent on 100% of your premises if the subtenant overholds. In fairness, the subtenant should be responsible to reimburse the tenant all costs and damages incurred by the tenant if the subtenant overholds — not just in connection with the subleased space.” — Laurie Sanderson (Partner, Gowling WLG)
Finalizing landlord consent
The landlord consent agreement refers to an agreement made between the landlord, tenant, and subtenant in which the landlord confirms their consent to the subletting of the space and has the tenant and subtenant each promise to perform the tenant’s obligations under the head lease. All the different provisions and considerations we’ve brought up so far ultimately need to be officially signed off on by the head landlord.
“At this stage, the subtenant is the party that’s most at risk in terms of impact. Subtenants need to figure out whether they should be agreeing to perform all of the tenant’s obligations under the lease, particularly if they are subleasing only part of the premises. Subtenants also need to negotiate the usual waiver of their special rights under the Commercial Tenancies Act.“ — Laurie Sanderson (Partner, Gowling WLG)
The Commercial Tenancies Act includes special protections for subtenants (including the right to affirm the sublease if the head lease is terminated, and to protect their assets from seizure by the landlord if the tenant fails to pay the head lease rent). The landlord’s consent will almost always require the subtenant to waive these rights. As a subtenant, you need to consider if it’s appropriate to do so or whether you have enough leverage to negotiate this.
The subtenant should also seek to have the landlord confirm in the consent to sublease, that the head lease is in good standing. The consent should also expressly address whether, as mentioned previously, the subtenant will have the right to pay its sublease rent to the landlord directly.
If you’re considering subleasing your office space or are looking into space that’s available for subleasing, make sure to seek out legal expertise and have your commercial agent negotiate thoroughly on your behalf. Our team is well versed in subleasing, and we are happy to assist.
Real Strategy believes that incredible people deserve amazing space! Contact us today so we can analyze your situation and provide you with the answers you need to see if subleasing is an option you should consider.