Seek protections from landlord before signing a sublease

By Kevin Oklobzija
BridgeTower Media Newswires

The coronavirus pandemic could very well leave a lasting impact on the office sector of commercial real estate, with work-from-home arrangements allowing companies to trim square footage from the monthly lease.

In the long run, that will be an easy strategy to implement. But for firms that may have recently signed a new lease, or that still have years remaining on a current lease, finding a subtenant may be a viable alternative.

“As the economy tanks, you will see companies that need to get out of their space,” said Charles “Chip” Russell, leader of the commercial real estate practice group at Harris Beach PLLC. “They will say, ‘We have 50,000 square feet but we only need 20,000’ and they’ll look to sublease, even if it’s at a loss.”

For smaller companies looking for a new home, securing that unwanted Class-A office space at a discounted rate as a subtenant may be appealing. But lawyers specializing in real estate law say a sublease isn’t necessarily the best choice.

While the sublease almost always requires the blessing of the landlord, it is still a contract between the primary tenant and the subtenant. If the primary tenant defaults, the subtenant has no claim to its space, unless there is specific contractual language in the sub-lease from the landlord.

“The landlord often will say, ‘The sublease is between you two’ and it may also say if the tenant goes away, the sublease has no rights,” Russell said. “I don’t know if a ton of people think way down the road on this.”

Said John Anderson, partner at Harter Secrest & Emery LLP who specializes in real estate law: “Often people will enter a sublease because they think it’s easier.”

In reality, the subtenant often is at the mercy of the prime tenant. Considering the impact COVID-19 has had on the economy, that could put the subtenant in a precarious situation if the health and viability of the prime tenant becomes tenuous.

“The COVID-19 crisis is going to be a useful tool for me in creating examples of the potential risks,” said Kristopher Vurraro, partner in the real estate development and finance department at Woods Oviatt Gilman LLP. “When you’re negotiating a sublease, you not only need to get the prime landlord’s consent, you want to also get some recognition language that in the event of a default by the prime tenant, that sublease becomes the prime lease.”

That way, as the subtenant, you still have an office if the prime tenant goes bankrupt or ceases to operate. Another safeguard for the subtenant is the ability to bypass the prime tenant when paying rent.

“See if you can pay rent directly to the landlord,” Anderson said. “That way if the sub-landlord defaults, you’re still paying for your space. The more proactive you can be as a subtenant, the better.”

An even wiser alternative, if possible, is to simply negotiate for the space with the building owner.

“The question I always raise, ‘Is there a reason we can’t just go the landlord and lease the space we need directly?’” Anderson said.

The rate per square foot may be more expensive but there will be more protections, Anderson said.

In reality, that is also the preferred option for the prime tenant, he said. “The tenant may ask, ‘Can I broker a deal between the landlord and the subtenant, then I have no liability.’”

As Vurraro points out, if the subtenant defaults, “the landlord may say you’re still on the hook for what they owe.”

For companies that currently hold a sublease, being proactive would be wise.

“The subtenant could always reach out to the landlord if they thought the prime tenant was in trouble,” Russell said. “I think most landlords are going to be working very closely to keep subtenants and tenants because there just aren’t (new) tenants signing leases right now.”

Said Anderson: “If you’re worried, you could tell the landlord, ‘Look, I know something is going on with the tenant, is there something we can work out just in case?”

One thing that lawyers can’t do, however, is wave a legal wand to make a current lease disappear.

“I will hear, ‘Can you find me a way to get out of my lease,’” Vurraro said. “Well, there’s no magic bullet but I could foresee the sublease becoming much more prevalent.”