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Wins & Insights

Tenant Leasing Illustrated – April 2015 – A Sublease of Ice and Fire

A Sublease of Ice and Fire

Recently, someone at my firm made the mistake of requesting suggestions for topics for a continuing legal education seminar being planned for a large client’s in-house legal group.

The mistake was including me on the email.

My suggestion: “Commercial Real Estate and the Game of Thrones: Use of Sword Fighting and Dragons in Lease Negotiations”.

Frankly, my topic would be much more interesting and perhaps even more useful than the (yawn) legal topic eventually chosen, but I mention this merely as evidence that it is that time of year again when generally staid people focus all their attention on a world of deceit, violence and thirst for empire.

Although it may sound like I am describing a commercial real estate closing, I am referring instead to Season 5 of the HBO Series Game of Thrones, based on the series of books “A Song of Ice and Fire” by George RR Martin.

As you may recall from past newsletters, I have trouble remembering all of the G.O.T. characters. I am also often confused since in G.O.T.’s fictional medieval land of Westeros, different warring families fight for supremacy in a chaotic scrum, where each party’s intentions are not clear, words are ambiguous and things are not always as they appear.

Take away the dragons and creepy zombie-like “whitewalkers”, and it sounds like I just described a sublease.

If you think about subleases too much (and who doesn’t), you suspect that they just do not work. Or at least that they require a leap of faith in order to work.

Most subleases provide that the tenant demises its leased space (or a portion of such space) to the subtenant, and all of terms and conditions of the overlease are incorporated into the sublease, except that “Landlord” means “Tenant”, “Tenant” meaning “Subtenant”, “Lease” means “Sublease”; well, you get the idea.

Then, to confuse you further, subleases exclude a laundry list of specific provisions of the overlease, plus such other terms of the overlease which are inapplicable, inconsistent with, or modified by, the terms of the sublease.

Finally, many subleases include provisions from the overlease obligating the landlord (i.e., now the tenant), to provide certain services such as HVAC, electricity, cleaning, etc. and to maintain the premises and building, but then turn around and say that notwithstanding all of that, the tenant has no obligation to provide any services, make any repairs or comply with any laws and that the subtenant needs to look solely to the landlord.

If you are not confused by now, then you must be George RR Martin and please tell me whether my girl Daenerys Targaryen ends up as Queen of Westeros.

But even if your eyes glaze over when you try to read the section of your sublease which excludes particular provisions of the overlease, you ignore this section at your peril. Much of what makes or breaks a sublease will be determined by which provisions of the overlease govern the subtenancy.

Whether approaching a sublease as the tenant/sublandlord or the subtenant, address the following five issues when reviewing the overlease exclusions in your sublease:

  • Exclude conflicting business terms. This is fairly straightforward. Your sublease will include specific business terms, for example the amount of your rent, the term, the calculation of escalations, the security deposit, etc. To avoid any confusion, the similar and conflicting provisions under the overlease should be excluded from your sublease.

○ Include payment mechanisms. While you want to exclude specific dollar amounts such as the rent, you should keep the details regarding payment, including when due, calculation of escalations, late fees and interest, etc.

  • Exclude provisions particular to the overlease. The overlease may include rights that are not applicable to a subtenant, such as renewal rights, rights of first offer/expansion rights or termination rights. The overlease might also include rights specific to a larger tenant (if the sublease is only for a portion of the leased premises), such as the right to use fire stairs or build an internal staircase, or unique to the particular tenant, such as the right to use an outdoor terrace. These are properly excluded.
  • Focus on difficult provisions. Subleases differ in how they handle certain more difficult provisions, in particular those dealing with services to be provided, compliance with laws and casualty and condemnation. Some tenant attorneys exclude these provisions since “Landlord” means “Tenant” under the sublease and the subtenant should look solely to the Landlord for such services, compliance and post-casualty/condemnation restoration. But subtenant attorneys often strenuously object, since in their view these provisions are too important to be excluded. Although we understand both positions, we generally include these provisions to make the subtenant comfortable and then provide specific language that the subtenant must look solely to Landlord for performance of these obligations.
  • Be careful of exculpation provisions. Many overleases limit the liability of the landlord entity to its interest in the building. That is understandable for a landlord with substantial equity in a large building, but the tenant has NO interest in the building itself and to be equitable this provision should be excluded from all subleases.
  • Include “quiet enjoyment”. The quiet enjoyment provision should be included either by being incorporated through the overlease or as a stand-alone provision in your sublease. Implicit in this provision is the notion that the tenant will not revise the overlease in a manner that is detrimental to the subtenant and, while this should also be spelled out in the sublease, the quiet enjoyment provision adds a little extra protection.

George R.R. Martin has been writing his Ice and Fire books since 1996 but has so far only finished five of the expected seven book saga, frustrating fans with the time between books and causing some devoted fans to worry as to whether he even will be around to finish the series. You can ensure now that your sublease will have a happy ending if you follow our five suggestions regarding overlease exclusions. Valar morghulis.