Sublease Basics

The sublease market has grown recently in many areas, as real estate markets have faced a downturn in demand. This fact has created opportunities for tenants in many cases.

At the outset, note that whether the parties call the transaction a sublease or an assignment is not dispositive. The substance of the transaction controls. A conveyance is a sublease (not an assignment) if the original tenant transfers all or a portion of the leased premises for less than all the remaining term of the lease.

It is very important to involve the original or "prime" landlord very early in the sublease or assignment discussions. Under Texas law, consent of the prime landlord must be obtained in order for there to be an effective assignment or sublease, unless the lease specifically provides otherwise. (Note that this is not the rule in all states.) Further, absent a contractual provision to the contrary, the prime landlord may arbitrarily withhold consent for an assignment or sublease, regardless of whether the refusal was unreasonable. (That is why it is so important from the tenant's perspective to negotiate for a clause in the prime lease stating that the landlord's consent may not be unreasonably withheld.) Remember also that many landlords' loan documents require lender consent to an assignment or sublease. Obtaining such consents may affect the timing of the transaction.

In today's market, the subtenant's motive for a sublease is often to obtain a lower rate. If that is the case, the subtenant should consider who will pay the "delta" (the difference between the prime lease rate and the sublease rate) if the sublandlord defaults under the prime lease. The subtenant may be able to negotiate for the sublandlord to pay or secure the delta at the time the sublease is put into place (if the sublandlord is financially able to do so), or negotiate for free rent at the front end of the sublease in the amount of the delta over the term of the lease.

The subtenant may desire assurances from the prime landlord that it may continue to occupy its space on the negotiated terms and conditions of its sublease if the sublandlord were to file bankruptcy or otherwise default in its obligations under the prime lease. The subtenant should also consider negotiating for a nondisturbance (or recognition) agreement, providing that if the prime lease is terminated before its set expiration date (for reasons other than the prime landlord's rights under condemnation or casualty provisions), and the subtenant is not in default, the prime landlord will allow the subtenant to remain in possession as long as it pays rent. Alternatively, the subtenant may wish to consider negotiating for a provision stating that if the prime landlord ends the prime lease with the sublandlord, the prime landlord will sign a new lease with the subtenant that mirrors the terms of the sublease.

It is probable that neither the subtenant nor the sublandlord will want the entire prime lease to be incorporated into the sublease. Items such as the rent and the term are usually not incorporated into the sublease by reference. The sublandlord will probably not want the subtenant to be allowed to exercise renewal or expansion options. The subtenant will probably not want to undertake all of the sublandlord's maintenance and repair obligations.
  

For further information on this topic, please contact Jim Cameron at jim.cameron@strasburger.com or Beth Tiggelaar at beth.tiggelaar@strasburger.com.

     
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