Because sublease rents are typically discounted, subleasing can be an attractive option for a variety of prospective tenants including start-up companies, companies entering new markets, and companies transitioning to different workplace models.

Subleasing also benefits prospective sublandlords that are seeking to downsize or relocate prior to the expiration of their existing lease term by enabling the prospective sublandlord to recoup a portion of its rental obligations from the subtenant.

However, subleases have certain intricacies that the parties should consider. If the parties fail to consider the special characteristics of a sublease when negotiating deal terms, they may find that their expectations cannot be met.

In this alert, we briefly address some of the considerations that prospective sublandlords and subtenants should be aware of when negotiating a sublease. For purposes of this alert, the sublandlord’s lease with the owner of the building is referred to as the “overlease” and the owner of the building is referred to as the “overlandlord”.

1. A Sublease Typically Requires Overlandlord Consent. The consent of the overlandlord is typically required for a sublease of all or a portion of the premises to a third-party. If the overlandlord’s consent is required, the sublease cannot be effective, and the term cannot commence until such consent is received. To address those consent rights, the term sheet for any prospective sublease should reflect that the sublease is subject to receipt of overlandlord’s consent and avoid using a date certain as the commencement date without qualifying that such date is subject to the prior receipt of that consent.

The parties should be aware that receipt of overlandlord’s consent may take time as the process typically entails review of the proposed sublease by overlandlord’s counsel and the negotiation of an agreement between overlandlord, sublandlord, and subtenant setting forth the conditions to such consent.

2. Sublandlord’s Rights are Limited by the Overlease. The rights of the sublandlord in respect of the premises are limited to the rights granted to the sublandlord under the overlease. The sublandlord cannot grant the subtenant rights under the sublease that are more expansive than the rights of the sublandlord pursuant to the overlease. Additionally, the sublandlord cannot grant the subtenant any rights that are personal to the sublandlord as tenant pursuant to the overlease (for example, an extension option in the overlease may provide that it only benefits the original tenant named in the overlease and certain permitted assignees, such as sublandlord’s affiliates).

It is important that the parties or their respective representatives review the overlease to confirm that the rights being conveyed to the subtenant under the sublease, including, without limitation, with respect to the proposed use of the premises, signage, parking, and use of building amenities do not exceed the rights granted to the sublandlord under the overlease. To the extent that sublandlord and subtenant agree that subtenant may request from the overlandlord any rights that are either not afforded to, or are personal to, sublandlord under the overlease, the term sheet should provide that subtenant will be entitled to such rights only with the prior written consent of the overlandlord to be granted or withheld in the overlandlord’s sole discretion and subtenant will be solely responsible for any additional costs thereof.

3. Services Remain Subject to Overlease. If the overlandlord is responsible for providing services such as, HVAC, electric, and janitorial services under the overlease, the subtenant will receive these services from the overlandlord to the extent that the overlandlord is responsible for same pursuant to the overlease. A prospective subtenant should review the services provided by the overlandlord and confirm that they are suitable for its needs.

The sublease should expressly exclude any obligation on the part of the sublandlord to provide services that are the overlandlord’s responsibility pursuant to the overlease.

4. Restoration Considerations. If the sublandlord is required to perform restoration work in connection with the expiration of the overlease (such as, the removal of an internal staircase or other alterations constructed by the sublandlord), and if the subtenant is not responsible pursuant to the sublease for performing such restoration, the parties should consider either a sublease expiration date that gives the sublandlord time to perform its restoration work or including language in the sublease that grants the sublandlord the right to enter the premises for an agreed upon period prior to the sublease expiration date in order to perform its restoration work.

5. Shared Premises. If the subtenant is only leasing a portion of the premises, the parties should consider whether they will share any amenities and if so, the parameters around such use. For example, the parties will want to consider how the space may be shared and how the use thereof will be paid, and whether there will be any shared use of conference facilities, printers, breakrooms, or other amenities. This conversation should address how the parties will handle cost-sharing, scheduling, and maintenance of any shared facilities or amenities. Additionally, the parties should determine how costs will be shared for items such as utilities and common area maintenance costs that the sublandlord may be responsible for pursuant to the overlease.

6. Unique Sublease Risks. As the sublease is not made directly with the overlandlord, if the sublandlord defaults under the overlease or becomes bankrupt, the subtenant might lose its sublease. A subtenant might seek to obtain protection from these risks from the overlandlord.

It is recommended that clients considering a sublease discuss with counsel at an early stage the potential advantages and disadvantages of subleasing and gain some familiarity with the rights and obligations of the sublandlord pursuant to the lease.

If you are considering a sublease or have any questions regarding subleasing, please contact one of the attorneys in the Moses Singer Real Estate practice group.