Tenant Leasing Illustrated – Dec 2017 – FF&E Provisions of a Sublease

Subleases sometimes include the right of subtenants to use the existing fixtures, furniture and equipment in the subleased space. The tenant/sublandlord moving on to other space may be purchasing all new FF&E and the older existing FF&E may fit the needs of the incoming subtenant, so if properly structured it can be a win-win for both parties.

In today’s issue, we focus on the FF&E provisions of a sublease and suggest five ways for sublandlords and subtenants to cover the use of such FF&E during the sublease term.

Sublease Antiques Roadshows

My wife Robin and I have recently been furnishing our house.

I have to admit, when it comes to shopping for furniture, I do not bring much to the table.

I would like to build our living room motif around a life-size Iron Throne replica from Game of Thrones (under the theory that if it was good enough for Aegon the Conqueror, then it should be good enough for us).

For some unexplained reason, this aesthetically innovative suggestion has been vetoed.

From countless time spent in showrooms and antique shops looking at chairs, tables, couches, etc., it is clear that there are three very distinct types of furniture; antique, contemporary and comfortable.

We seem to have settled on antique. So, rather than buying a brand new piece of furniture, we spend twice the amount on an older, creakier, beat-up version, since older, creakier and beat-up is now called “distressed”.

Very distressing, but at least antique furniture does not require assembly.

Furniture is not generally addressed in an office lease. At the lease negotiation stage, tenants may have done some planning with their architects and designers and may have prepared preliminary test fit plans, but not much more.

However, furniture, as well as other personal property such as fixtures and equipment, can sometimes become an area of focus in a sublease.

That is because a tenant subleasing its space and moving to new space often does not need its old fixtures, furniture and equipment (FF&E), while a subtenant, particularly one subleasing for a relatively short time based on the remaining term under the overlease, may be more than happy to take FF&E that fits the subleased space, is readily available and does not require a large expenditure.

The FF&E can be licensed to the subtenant for the term of the sublease or it can be transferred to the subtenant, either up front or at the end of the term.

An often contentious issue regarding FF&E is which party is responsible for removing the FF&E at the end of the term, since the FF&E will likely have little value at that point and the overlease generally requires that the tenant remove the FF&E at the end of the overlease term.

Tenants and their subtenants will often jostle over who ends up with this responsibility.

Sit up and address your sublease FF&E provision by following the following five suggestions:

Do an inventory. Take the time and effort to create an inventory of the FF&E being transferred or that may be used along with the sublease. Many subleases will simply provide that the subtenant can use all FF&E in the subleased premises as of the commencement date of the sublease. This may be the easiest way to describe what is being transferred, but will likely lead to confusion later on. A full inventory (even including pictures of each item) is the best way forward.

Deliver “as is”. The sublease should indicate that the FF&E is being delivered in its “as-is, where-is” condition, without any representation or warranty from the tenant/sublandlord regarding the FF&E or its suitability for the subtenant’s purposes, other than that the sublandlord owns the FF&E free and clear and is entitled to transfer or license the FF&E to the subtenant. This is certainly important in terms of the sublandlord’s liability, but subtenants should also not expect sublandlord representations except under particular circumstances.

Specify license or sale. If the FF&E is being sold to the subtenant, the sublease should include a bill of sale. This transfer may occur either at the beginning or at the end of the sublease term, although sublandlords will want to provide for such transfer at the end of the sublease term so that the sublandlord can take back the FF&E in the event of a default by the subtenant under the sublease (and potentially use such FF&E with another subtenant). Although the transfer is often made as part of the sublease and without separate compensation, one of the two parties should be made responsible for sales tax liability, if any, in applicable states.

If the FF&E is only being licensed to the subtenant, then the sublease should so indicate and provide that the FF&E may be used by the subtenant during the term and must be returned to the sublandlord at sublease expiration.

Address maintenance. Generally, unless the FF&E is being sold to the subtenant at the beginning of the term, the sublease will provide that the subtenant will be responsible for maintenance and repair of the FF&E during the term, subject to reasonable wear and tear, obsolescence and damage by fire or other casualty. Often, a sublease will provide that the subtenant may not remove the FF&E from the Premises during the sublease term unless such FF&E is replaced with comparable property.

Address end of term obligations. At the end of the sublease term, the cost to remove the FF&E could very easily exceed the value of the FF&E itself. Neither the sublandlord nor subtenant will want to incur this cost. Even if a subtenant was prepared to remove the furniture, it would not want the obligation to remove fixtures and equipment (e.g., supplemental HVAC equipment) installed by the sublandlord.

In addition, the failure to timely remove the FF&E from the subleased premises could lead to a holdover (and holdover penalties) if the sublease term ends contemporaneously with the overlease term, which can be particularly expensive for both sublandlord and subtenant if the subleased premises represents only a portion of the premises demised under the overlease.

In no small part due to the holdover concern, if the sublandlord is responsible to remove the FF&E at the end of the term, the sublandlord will need access to the subleased premises prior to the expiration of the sublease in order to perform its restoration obligations. Since this would be extremely disruptive to the subtenant’s business (and there would be no FF&E to use going forward), the sublease term would need to be shortened by the time (e.g., a few weeks or perhaps longer) necessary for the sublandlord to perform this work. Alternatively, there can be a clear provision allowing the sublandlord to perform its removal and restoration obligations prior to the expiration of the sublease and overlease.

Noel Coward was said to sum up his philosophy of acting by saying “Just say the lines and don’t trip over the furniture!” Follow the suggestions above and you will not trip over the FF&E provisions of your sublease.