Tuesday, March 29, 2011

Chinks in a Subtenant’s Armor

Recently, I received a call from a prospective client (the “PC”) regarding a sublease the PC had entered into as a subtenant less than a month earlier. It turned out that the tenant (the sublandlord in this case) failed to comply with provisions of its lease (i.e., the “main lease”) and its landlord put the sublandlord on notice that this failure constituted an “Event of Default.” The notice stated that, unless the sublease was terminated immediately, the landlord would start proceedings to terminate the main lease. Imagine the PC’s shock upon learning that it was about to be dispossessed from its premises shortly after having taken possession.

Simply stated, a subtenant’s leasehold rights derive entirely from those of its sublandlord. That means that if the sublandlord’s lease with its landlord is terminated, the subtenant’s rights will simultaneously be terminated. Not a predicament a subtenant wants to find itself in. (In this case, the landlord was unwilling to compromise, so the PC’s proverbial goose was cooked.)

Were there steps that the PC could have taken to avoid this situation? Yes. First, the PC could have asked to review the non-monetary terms of the main lease. By this simple process, the PC would have discovered that the landlord required that certain conditions precedent to any subletting had to be met by the tenant. Second, the PC could have requested the landlord’s written consent to the sublease, thereby removing all doubt as to the landlord’s consent.

Of course, even if a landlord consents to a sublease, a subtenant’s situation is still at risk to an early termination of the main lease. To minimize that risk, a subtenant can ask the landlord for a non-disturbance agreement (an “NDA”), which will require the landlord to recognize the sublease even if the main lease is terminated before the expiration of its term. However, this is a case where size counts. If the subleased space constitutes only a small portion of the tenant’s space, the landlord will, in all likelihood, be unwilling to execute an NDA; if, on the other hand, the subleased space is of significant size, the chances of obtaining an NDA increase, although it would not be unreasonable for the landlord to impose conditions precedent to its effectiveness (such as requiring that the subtenant first cure any existing main lease default by the sublandlord, or requiring the PC assume all of the sublandlord’s main lease obligations, including those pertaining to rent and the length of the remainder of the lease term). If a landlord is unwilling to give a subtenant an NDA, the subtenant can ask the landlord to send it copies of default notices and request that it be given an opportunity to cure its sublandlord’s defaults.

Admittedly, in the subject case, the PC has remedies available to it against its sublandlord (e.g., breach of the covenant of quiet enjoyment (if there is one in the sublease) and/or breach of contract), but these remedies are inadequate to compensate it for the loss of its possession of the subleased space and the PC is most likely going to have to find and relocate to space elsewhere.

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