Subleasing Poses Up-Front Risks to Landlord and Tenant

Ruder Ware

Even though the increase in vaccinations and other public health initiatives have resulted in a dramatic reduction in new COVID-19 cases hinting at a possible “return to normal,” recent industry publications are starting to report on an anticipated long-term result in what was once thought to be only a short-term trend for commercial leasing: the permanent stay-at-home work force. One of the results of the sweeping changes to workplace utilization over the past year has been the perpetuation of work-from-home (or work-from-anywhere) professional staff. This trend has resulted in many companies rethinking their commitments to brick and mortar office requirements.

In the past, professional office tenants have tended to enter into long-term leasing arrangements in an attempt to manage costs related to their workforces. Now that these demands may be decreasing in the remote-work environment, these tenants caught in the long-term arrangements are looking for alternatives to reduce their physical plant expenditures. One such method has been through subleasing floor space to alternative users.

While subleasing (or subletting) space has existed as long as leasing itself, in today’s commercial settings, landlords often face additional restrictions on their leasing flexibility. These restrictions can often be found in loan agreement terms that place limits on subletting a property subject to a mortgage. Failures to comply with these loan agreement restrictions typically carry the same default penalties as a failure to make a loan payment. Restrictions may also be found in property covenants (often called CCRs, short for covenants, conditions and restrictions) that were put in place when the property was originally developed. Landlords would be well advised to examine their ownership and financing arrangements to determine if they even have the right to review and approve a possible subleasing of their property.

Tenants must also consider the restrictions and limitations that may exist prior to entering into any sublease arrangement. Very often the written lease document will contain specific provisions addressing these types of rights. It is not uncommon for there to be very limited chances for a subleasing arrangement to be made, and in most situations such arrangements are subject to review and approval in advance by the landlord. It is not out of the ordinary for there to have been some limited negotiations around loosening these restrictions when a lease is initially signed, however the landlord-approval provisions are almost never waived by landlords entirely. Other provisions of the lease may also impose limitations on possible subletting, including permitted use provisions that specify what type of uses any tenant or subtenant can make of the property. Failures to comply with these provisions can trigger defaults. Tenants are cautioned to review their entire leases before beginning down the path of subletting.

In sum, advance planning and review of existing arrangements for both landlord and tenant is warranted when considering the possibility of a sublease.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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