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Wins & Insights

Tenant Leasing Illustrated – September 2019 – Brexit, Nutella and your Sublease

Brexit is too complicated for me to fully grasp.

Okay, so is commercial leasing, but let’s not go there.

But something I can understand is Nutella.

For those of you living a sad and gastronomically impoverished life, Nutella is a hazelnut and chocolate spread created by divine intervention.

I eat it with just about anything and have even been caught diving into the jar with just a spoon (and maybe with a hint of peanut butter peeking out to preserve what little is left of my dignity).

So I can understand why Brits have been stockpiling Nutella (and other “essentials”) fearing that a “no-deal” Brexit will leave them without European imports and with unacceptable shortages.

And nothing would be more unacceptable than a Nutella shortage!

Europeans love their Nutella. In France, land of gourmet excellence, you can find massive jars of Nutella (enticing me to break one of my cardinal rules: never eat anything larger than your own head).

Of course, the British are not sure if they are true Europeans and have made the resolution of that question more complicated than the NBA salary cap.

Why separate from the land that invented Nutella is beyond me but with hard Brexits, soft Brexits, referendums, “backstops” and “legislative black holes” it is enough to make your brain numb.

Even with an October 31 deadline looming, the potential exit has gone on so long and there have been so many extensions and missed deadlines that some squirrely stockpilers have had to break into their stashes, if nothing else before their sell-by dates pass them by.

I can tell you right now that the Nutella would not have lasted long in my stash in any event.

Commercial leasing can also be complicated and that is especially true when a tenant looks to enter a building by subleasing from another tenant and then having that sublease convert at the end of its term into a direct lease with the landlord.

Sometimes, the tenant may already be a tenant in the building, but while the landlord may be happy to enter into a direct lease for the new space once the sublease term is over, it may not be willing to let an existing tenant/sublandlord with strong financials off the hook by recapturing the premises.

Under these circumstances, the tenant/subtenant has to balance the sublandlord and the landlord and a few extra documents (not only a sublease and landlord consent, but also either a direct lease or amendment to an existing lease).

Enough to make you throw up your hands and take a dip in the Nutella jar.

To balance the black holes when subleasing into a direct lease, follow these seven suggestions:

Think like a direct tenant. Meaning you should be more assertive and expect landlord to treat you as a direct tenant (maybe you already are a tenant) rather than a subtenant, since tenants generally have more rights and flexibility than subtenants.

Utilize the Landlord Consent. The best place to provide for treatment as a direct tenant is in the three-way consent document among landlord, sublandlord and you that is part of every sublease.

You should be entitled to make direct requests to landlord for services and other requests (e.g. for improvements, further subletting, etc.).

Require the same assignment and subletting rights as sublandlord and provide that sublandlord is deemed to have consented if landlord consents. In particular, you should have an ability to assign or sublease without landlord or sublandlord consent in the event of a “corporate transaction” (e.g., merger, reorganization, sale, etc.) or affiliate transaction. If you are already a tenant in the building, you may prefer to have the assignment and subletting provisions of your existing lease govern so that all of your space (direct and subleased) is treated the same.

Allow alterations subject to the terms of the direct lease between sublandlord and landlord. Again, provide that if landlord’s consent is given then sublandlord is deemed to have approved. Sublandlord may be concerned with its end of term obligations, but the consent can waive such obligations on the part of sublandlord and/or provide that you alone will be responsible for any removal or restoration obligations that may still be applicable. If you are already a tenant, then you may want the alteration provisions of your existing lease to govern. If possible, landlord should also confirm that you do not have any obligation to remove or restore existing alterations in the subleased premises.

Most subleases provide that if the landlord does not meet its obligation to provide services or make repairs after request from the sublandlord, then the subtenant can take legal action against the landlord either in its own name or, if prevented by lack of privity, in the sublandlord’s name (with appropriate indemnities from the subtenant). Landlord should agree in the consent that you can take any such legal action directly in your own name.

To the extent you require and have negotiated with sublandlord for early access to the subleased premises (e.g., for taking measurements, installing cabling, etc.), landlord should agree to such access.

In the event of a conflict with the sublease or direct lease, the consent document should control.

Require attornment from landlord. Many landlord consents provide that if the direct lease between landlord and sublandlord terminates, the landlord has the option to require that the subtenant vacate the premises or attorn to the landlord upon the terms of the sublease. You should require that in the event of such termination (for any reason, even after a casualty or condemnation as provided below), landlord must select attornment and recognize you as a direct tenant.

Address future possession. Your sublease should indicate that you will have the right to remain in the subleased premises on the expiration date of the sublease and will not be in default under your sublease (or be subject to holdover charges) since you will remain in the premises as a direct tenant.

Many subleases provide for an expiration date that is one day prior to the expiration date under the prime lease, but in this instance any such “gap” should be eliminated, and your sublease should expire at midnight on the day prior to the commencement of your direct tenancy.

Address conflicting sublandlord provisions. Your sublandlord’s lease may include provisions that will not work with this structure. For example,

You will need to have any renewal rights of your sublandlord waived (either in the consent or in an amendment to the lease between your sublandlord and landlord) since your direct lease commences when the sublease expires.

You (not your sublandlord) should be entitled to exercise any rights to terminate sublandlord’s direct lease with landlord after a casualty or condemnation (and if you are already a tenant, pursuant to the terms of your existing lease). Alternatively, landlord should be required to attorn and keep your sublease as a direct lease after such termination (see third bullet point above).

Prevent sublandlord lease modifications. Your consent should be required before landlord and sublandlord can amend their lease or before sublandlord can grant any consent or approval under such lease.

Consider your direct lease incorporations. If you are already a tenant, there may be provisions in your lease that you would want to apply to your sublease and eventual direct lease. We already mentioned some above (e.g., assignment/subletting and alterations), but there may be other appropriate instances such as landlord’s agreement to remediate hazardous substances or remove violations that interfere with your construction, an ability to use fire stairs, the right to connect wiring between floors, etc.).

Even if I follow my father-in-law Len’s usual advice to “speak British, but think Yiddish”, I still cannot make much sense of Brexit. But if you use the seven suggestions above as your backstop, your sublease and direct lease can be as blissful as a heaping spoonful of Nutella.