A Shortcut To Drafting A Sublease That Might Be The Long Way To Get The Job Done

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A sublease is really no different than a lease other than its title and the use of different labels (subtenant instead of tenant; sublandlord instead of landlord; sublease instead of lease; etc.). It needs to convey an interest in real property and it needs to establish the contractual relationship between the subtenant and its sublandlord. One might think it to be “special” because it is constrained by a superior lease (master lease; overlease; etc.), but that’s not any different than a lease being constrained by a superior mortgage, a restrictive easement agreement, zoning laws, etc. In each case, the grantor (landlord or sublandlord) can’t give greater possessory rights than it, itself, has and can’t give any contractual rights that it has agreed (say in a mortgage) it won’t give or that the law won’t allow. Neither can a sublandlord.

But, there is an approach that crafters of subleases often use that is not available to crafters of leases. That’s by using an “incorporation by reference” form of sublease. [That’s not to say leases never incorporate parts of other documents by reference to those documents, references to laws being one example. And, its also not to say that there couldn’t be a publication with “standard lease terms” that might be incorporated by reference, as is done when requiring one party or the other to abide by ASTM, ASHRE or similar standards, just that, if that is being done out there, it’s a rare occurrence.]

What is an “incorporation by reference” type of sublease document? Basically, it is an approach that tries to say: “Take the underlying (master) lease and change landlord to sublandlord; change tenant to subtenant; change leased premises to subleased premises; make the subtenant look to the landlord of the underlying lease for everything that it needs from its own sublandlord (and cut the “middleman-sublandlord” out of the loop; make the subtenant abide by all of the rules and strictures printed in the underlying lease; and list all of the provisions of the underlying lease that are inapplicable to the sublease.

Why do it that way? – mostly because those who use this approach think its saves time. Ruminations doesn’t. That’s why they have to run the race.

One legal forms publisher offers a two page sublease form based on this approach. Of course, there are longer forms available that rely on this approach. Each includes the following “umbrella” concepts, though not necessarily in such detail:

X. This Sublease is subject and subordinate to the Master Lease, and to all leases, mortgages, and other matters to which the Master Lease is subject or subordinate. This provision will be self-operative but Subtenant, within 10 days after its receipt of Sublandlord’s written request therefor, will execute any instrument reasonably requested by Sublandlord or Master Landlord to evidence or confirm the same. Sublandlord represents that: (a) a true and complete copy of the Master Lease (excluding redacted terms and conditions not relevant to Subtenant) is attached hereto as Exhibit A; (b) Sublandlord is the tenant under the Master Lease; (c) the term of the Master Lease began on ____________; (d) the expiration date of the Master Lease is _________; (e) the Master Lease is in full force and effect; (f) to the best of Sublandlord’s knowledge, Sublandlord is not in default under the Master Lease; and (g) Sublandlord has not received any notice of default under the Master Lease, except for any defaults which Sublandlord has cured and Master Landlord is no longer claiming to exist.

Sublandlord will not voluntarily terminate the Master Lease except pursuant to a right of termination arising out of casualty or condemnation expressly set forth in the Master Lease, and Sublandlord will not amend the Master Lease in a manner adverse to Subtenant in any material respect. If the Master Lease is terminated for any reason, this Sublease will also terminate. Sublandlord will not be liable for any such termination unless such termination: (a) arises out of a default under the Master Lease by Sublandlord, where such default did not arise out of a default hereunder by Subtenant; or (b) had been effectuated by Sublandlord in violation of this Section X.

Y. Except as is otherwise expressly provided in, or is otherwise inconsistent with, this Sublease, and except to the extent not applicable to the Subleased Premises, the Incorporated Provisions are hereby incorporated in this Sublease by reference with the same force and effect as if set forth herein, except that, unless the context requires otherwise:

(a)  references in such provisions to Owner, Landlord or Lessor are deemed to refer to Sublandlord;

(b)  references in such provisions to Tenant or Lessee are deemed to refer to Subtenant;

(c)  references in such provisions to the Premises or the Demised Premises are deemed to refer to the Subleased Premises;

(d)  references in such provisions to other provisions of the Master Lease that are not incorporated herein are to be disregarded; and

(e)  references in such provisions to subleases, sublettings or subtenants are to be deemed to refer to subsubleases, subsublettings or subsubtenants.

Z. Sublandlord is not deemed to have made any representation made by Master Landlord in any of the Incorporated Provisions. Moreover, Sublandlord is not obligated:

(a)  to provide any of the services or utilities that Master Landlord has agreed in the Master Lease to provide;

(b)  to make any of the repairs or restorations that Master Landlord has agreed in the Master Lease to make;

(c)  to comply with any laws or requirements of public authorities with which Master Landlord has agreed in the Master Lease to comply; or

(d)  to take any action with respect to the operation, administration or control of the Building or any of its public or common areas that the Master Landlord has agreed in the Master Lease to take,

(all the foregoing being herein called the “Building Services”) and Sublandlord will have no liability to Subtenant on account of any failure of Master Landlord to do so, or on account of any failure by Master Landlord to observe or perform any of the terms, covenants or conditions of the Master Lease required to be observed or performed by Master Landlord.

[Adapted from the 2012 revision of the Form of Sublease originally prepared by the Committee on Real Property Law of the Association of the Bar of the City of New York. See: www.nycbar.org.]

At the mid-set of today’s posting, and in the interest of full disclosure, Ruminations does not endorse or recommend the use of “incorporation by reference” subleases. We don’t believe they save any meaningful time and think their use results in inferior, incomplete agreements. Ours, however, may be a minority view, and that’s why we are pressing on with today’s posting.
There is no substitute for approaching the drafting process as if engaged in some form of virtual reality. Anyone preparing a sublease that relies on “incorporation by reference” needs to “walk” through every provision of the master lease (and every provision of the sublease) as if she or he were: first, the subtenant; then, the sublandlord; and then, the master landlord, along the way, always asking: “How do the ‘converted’ provisions work?”

If one does that, she or he will realize that there are three categories of provisions encountered during the virtual reality walk. They are: (a) the provisions to be excluded; (b) the provisions that “kind of work,” but need to be modified; and, the largest category, (c) the provisions not in the master lease that ought to be in the sublease.

Today, we’re only going to make lists, not explain possible approaches to the listed items. That’s one way we’ve been able to have grist for the mill, this being our 170th blog posting – saving “stuff” for later postings.

WHAT PROVISIONS WOULD TYPICALLY BE EXCLUDED?

  • Rent (Base)
  • Assignment and Subletting (or they might be changed)
  • Right to self-insure
  • Renewal Options
  • Cancellation or kick-out rights
  • Expansion rights
  • Rights of first refusal
  • Tenant allowances
  • Rebates to tenant

WHAT PROVISIONS WOULD TYPICALLY BE CHANGED?

    • Definition of Lease Term – when it starts and when it ends
    • Delivery condition
    • Percentage Rent
    • Use clause (to limit or narrow it)
    • Alteration and improvement rights
    • Default periods (as to the Subtenant, to shorten them)
    • Notice and other time periods (some shortened and some lengthened)
    • Rights based on damage and destruction (especially retaining Sublandlord’s right to terminate and denying those rights to Subtenant)
    • Rights based on eminent domain (especially retaining Sublandlord’s right to terminate and to receive proceeds and denying those rights to Subtenant)
    • Environmental provisions (for the Subtenant’s particular use)
    • Those where the Sublandlord has negotiated extremely favorable rights based on its own bargaining power)
    • Default remedies provisions (e.g., conditional limitation vs. eviction action)

WHAT PROVISIONS WOULD TYPICALLY BE ADDED?

    • Sublandlord’s sole obligation is to pay rent and additional rent to the Master Landlord
    • Subtenant needs to give copies of notices it receives to Sublandlord
    • Subtenant’s desire that Sublandlord try to get a recognition agreement
    • Obligations that the Master Lease says the Sublandlord (as tenant) has to perform, are to be performed by Subtenant
    • Where the Sublease would imply that the Sublandlord under the name substitution construction is obligated to act as if it were the Master Landlord under the Master Lease, the Sublandlord’s sole obligation is to try to get the Master Landlord to do what the Master Lease requires
    • At some point in time, Subtenant can cure Sublandlord’s defaults under the Lease
    • No rent abatement for anything
    • No further subleasing
    • No assignment of Sublease
    • No use by others
    • Indemnity provisions as between Sublandlord and Subtenant
    • Subtenant is to indemnify Master Landlord
    • Rent to Sublandlord
    • Additional Rent to Sublandlord
    • Late Charge
    • If Master Landlord withholds its consent, Sublandlord isn’t unreasonable if it withholds its consent
    • Only an injunction can be sought as the remedy for failure to get consent
    • Notice provision as between Sublandlord and Subtenant
    • Security deposit payable to Sublandlord
    • Insurance – different limits; different or extra additional insureds and loss payees
    • Additional restrictions on alterations
    • Sublandlord’s right, but not obligation to cure Subtenant’s defaults – no mitigation claims
    • Brokerage provision for the Sublease itself
    • Holdover provision and remedies for holdover (keeping in mind possible “expanded” damage to the Sublandlord)
    • Individualized business terms
    • Attached (redacted) Master Lease
    • Allocation of parking spaces
    • Adjusted pro rata shares
    • Utility service sharing
    • Rights as to terminating Master Lease or Sublease upon an event causing damage or destruction
    • Barring Subtenant from using Subleased Premises for the stated (Subtenant’s) exclusive use
    • Exculpation of Sublandlord
    • Exclusive use right imposed by Sublandlord against Subtenant

As always, Ruminations invites suggestions from its readers, this time as to other sublease provisions that might be wise to consider when “doing” an “incorporation by reference”-style sublease. Just add your comments below.

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Comments

  1. Amen Ira. There is no easy way to do this. One has to “walk” through every provision of the lease as you say and put yourself in everyone’s else’s shoes to see if each provision works in the sublease context. I’ve tried it everywhich way and came to the same conclusion.

  2. Steve Teitelbaum says:

    All true. But to my mind an even greater problem is when the sublandlord and the subtenant negotiate an all-new sublease between them, as if they have a blank slate. Maybe they use the master lease form as their starting point and maybe they use an entirely unrelated prime lease form as their starting point, and in either case simply retitle the document “sublease.” They wind up with many inconsistencies between the prime lease and the subease and maybe even purport to grant the subtenant greater rights than the sublandlord has. (Then they conscientiously present it to the prime landlord for approval and, of course, are outraged, just outraged, that the prime landlord (or its bleeping lawyer) rejects it and demands they, in their view, “waste time and legal fees,” to do it all over again after they worked so hard on it the first time around. 🙂 )

  3. Sidney Saltz says:

    Marty Miner and I, with input from Richard Frome, developed a generic form of sublease which really works. We originally published an explanatory article (with a form) in the Real Property, Probate and Trust Journal in 1999, but we updated the article (and a better version of the form) and published it in the Spring 2006 edition of the same Journal. It is not an “incorporation by reference” form, nor is it a total reworking of the master lease. It really works for retail, industrial and office subleases. I do not know if the form is available on the internet or not, but it should be, and it should be considered when drafting subleases.

  4. I couldn’t agree more. What appears to be a shortcut is a nightmare as soon as you have to try to enforce any of its terms. Thanks for this Ira.

  5. George Bernhardt says:

    As a sublessor, I would typically use an incorporation by reference form not to save time, but to ensure that all obligations of the subtenant are precisely back to back with my obligations under the head lease. As a tenant, I’m happy to use a self-contained form as I don’t have these concerns and am happy to try to negotiate a better deal than the original tenant did. When I’m the sublessor, however, I don’t want there to be any areas where, for example, I am required to indemnify the landlord for something and the subtenant is not required to indemnify me.

  6. I agree that the preferable method is to draft a separate sublease. However, most often the master leases I see require that in any sublease the master lease be incorporated by reference. I appreciate the article. Please see the short article about subleases I recently wrote for my own commercial real estate blog: http://www.commercialrealestateorlando.net/considering-a-sublease-look-both-ways/

    and my blog, generally:

    http://www.commercialrealestate.net

  7. Henry Pharr III says:

    Agree with Ira. One size or shortcut is not best for all sublease situations. Have emphasized this to clients, especially when the sublessee has a different use or may convert the interior of the premises to its own needs. Great article! Brad’s article is also incisive and helpful. It is the little things that make the biggest difference.

  8. Tim Scott says:

    Good points Ira, and a solid checklist, but whether you draft a stand-alone or an incorporating Sublease, you suffer the same challenge/nightmare of coordination (excluding master ground leases that you can ignore). Because of the need to keep obligations back to back, with no gap, I always prefer an incorporation approach for any significant sublease, but that never means just slap on the master lease and go. It means that you have to carefully read the master lease for what to incorporate and what to exclude, for how to modify numerous provisions, and as you note, for what to add. This thoughtful incorporation approach reflects your checklist and is best for making sure that the sublandlord in the middle is covered by subtenant’s (or master landlord’s) obligations and there is no argument for conflicting interpretations of provisions on the same subject matter in 2 different documents. Every stand alone sublease will have gaps or opportunities for someone to exploit.
    The big challenge, of course, is making the client understand that the “simple sublease” is never quite that simple a task and to keep the cost of doing it right within the fiscal reality of the sublet revenue.

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