Tenant Leasing Illustrated – January 2019 – Steering Your Sub-Sublease

At New Years’ resolutions time, many of us lament how we get larger with each passing year.

The same is not true for Knickers.

You see Knickers is a six foot four inch steer in Australia weighing in at a more than svelte 1.4 tons when most steers of his breed are four foot ten inches and weigh a good deal less than a ton (see picture below).

Knickers is so big in fact that when it came time to make him into hamburger no one bought him at auction because he was too big to fit into their farm equipment.

Knickers is a dairy breed called Holstein-Friesian, not a cow (i.e., a female that has had at least one calf) but instead a steer (a male that has been neutered). Okay, so maybe everything has not always worked out Knickers’ way.

But this bovine Shaq has become a social media star for beating the system while at the same time generating a good deal of sympathy since, as he towers over his fellow cows and steers, he looks, as one person said, the way you feel when you do not know anyone at a party.

I would like to figure out how Knickers does it. Maybe if I follow his lead it is not too late for me to stand a little taller and be drafted by the NY Knicks (yes, I know, both a Mets and a Knicks fan; what a pitiful existence!).

Most steers are slaughtered at around 15 months old and Knickers is now seven years old.

If steers live long enough before becoming a steak dinner they can continue to grow so once Knickers beat the rap as a youngster he was free to chow his way into the record books.

Apparently, being castrated helps the growth process too (maybe the Knicks will have to get along without me).

At this point you may be thinking as you often do when reading this newsletter, “where’s the beef?” But I will get to that too.

You see, commercial leasing also has its unusual animals and one of them is the sub-sublease.

No, you are not seeing double. A sub-sublease occurs when a subtenant subleases its space to, well, a sub-subtenant.

This can be a helpful option for both a subtenant and a potential sub-subtenant.

A subtenant needs exit strategies with respect to its sublease just as a tenant does with respect to its lease. The subtenant may need to give up or reduce its space because business is going well and it needs to move to larger premises or because its business is not doing well and it needs to reduce its costs.

A sub-subtenant is usually in the market looking for a relatively inexpensive option on a short-term basis.

Sub-subleases are generally short-term options since there is greater risk involved and a sub-sublease is a sublease with another layer of risk tacked on.

Since a sublease is subordinate to the overlease from which it derives its rights to the subleased premises, a sub-subtenant runs the same risk as any subtenant that the sublandlord/tenant could default under the overlease and also the double risk that its sub-sublandlord/subtenant could default under its sublease.

Because of the layers of risk, subleases are generally less expensive than leases and sub-subleases are generally less expensive than subleases.

There are actually sub-sub-subleases, but I am getting a little dizzy just thinking about it.

Landlords for the most part do not like subleases or sub-subleases. They recognize the need for tenant and subtenant exit strategies, but do not want this below market space to compete with the landlord’s more expensive direct space.

To some extent, the burgeoning flexible workspace/shared office market has fit into this short-term less expensive slice of the market, but sub-subleases are still available as a potential option.

Whether you are a sub-sublandlord or a sub-subtenant, it is udderly important that you milk the most that you can out of your sub-sublease by covering the following eight issues:

Grant an affirmative right in your lease. Ideally, if you are the prime tenant, your lease should affirmatively provide that any potential subtenant will have the same rights to assign or sublease as you have under your lease. This will make it much easier for you to sublease because your subtenant will have the same exit strategies as are available to you. Many leases provide that any assignments or subleases by a subtenant will be subject to landlord’s consent in its sole discretion and this type of provision should be strongly resisted.

Negotiate modified rights. If as the prime tenant under a lease, your landlord resists allowing any potential subtenant the same rights to assign or sublease as you have under your lease, negotiate for limited rights that may get you to an acceptable place.

For example, you might provide this right only for subtenants of at least a certain size, such as ones taking at least one full floor or no less than fifty percent of your space.

You might also allow this right one layer down, i.e., allowing your subtenant the same rights as you to assign or sublease but not allowing its subtenant further rights without the landlord’s consent (i.e., sub-subleases would be allowed but not sub -sub-subleases without the landlord’s consent).

Think sublease. A sub-sublease is really no different than a sublease and, as the sub-subtenant, you need to perform the same due diligence as we have counseled in the past by carefully reviewing the overlease terms since they will be incorporated into your sub-sublease. But you will also need to carefully review your sublease terms, in part to ensure that it does an adequate job as to which terms are and are not included from the overlease.

Consider end of term. As a subtenant/sub-sublandlord you will usually be subject to high holdover charges if you do not timely vacate at the end of your sublease term and the same will be true if your sub-subtenant holds over. You may want to provide for an expiration date under the sub-sublease a few days (or even weeks) before the expiration date under your sublease (or perhaps a right of early access) to allow you time to put the premises in the condition required under your sublease. You may also want to limit the sub-subtenant’s ability to make alterations during the term.

Four-way consent. With an additional layer of sub-subtenant, a sub-sublease consent will get a little more complicated as four parties need to agree on the document; the landlord, the tenant/sublandlord, the subtenant/sub-sublandlord and the sub-subtenant. You should plan on extra time needed to finalize as each party weighs in with comments.

Use sublease form. Since the rights and obligations of a sub-subtenant flow directly from the sublease, it is a good idea to use the same form for your sub-sublease as you used for the sublease, with appropriate modifications. A sublease is a different animal from a lease so it is on a different form, but the sublease incorporates certain provisions from the lease and excludes certain provisions from the lease. Since the sub-sublease is the same as a sublease just one layer down, using the same form will allow for a clear flow of obligations that will be easy to follow.

“I could dance with you till the cows come home. Better still, I’ll dance with the cows and you go home.”

-Groucho Marx, Duck Soup

I know, I do quote Groucho a lot, but if you have read any of my lease provisions you would understand the general slapstick theme. Follow the six suggestions above and your sub-sublease will stand tall. And that’s no bull.