Subleasing – There is More to it Than You Might Think

April 23, 2012

Life sciences companies with a surplus of laboratory or office space, or start ups that are willing to sublease “just a little space,” might be tempted to sign a generic sublease with a willing subtenant, or sublandlord, without considering the potential risks or missed opportunities. In the current market, space available for sublet is increasing as sublessors (prime tenants) look to shed excess space, while businesses (potential subtenants) are seeking shorter terms and lower rents in what they hope will be better space than what they could afford a year ago.

Some clients may be tempted to give subleasing even less attention than “regular” leasing because “it is just a sublease.” We beg to differ.

It is never “just a sublease.” Adequate legal review and advice on a sublease is not shorter or “less serious” than the review and advice attorneys should give clients on a direct lease. In fact, adequate legal advice on a sublease, whether on behalf of the proposed subtenant, prime tenant/sublandlord or landlord, can often be more complex than a direct lease review.

Leases and subleases are major assets for any business and often do not receive the attention they deserve. Brokers are helpful in locating space or tenants in specific markets but they do not have the legal background to be skilled in wordsmithing or pointing out places in the leasing contracts where extra protection could make a difference.

In order to help protect your assets and your production facilities, labs and offices, we have outlined below a few of the many reasons why it pays to have complete professional review of a sublease before signing.

1. The Prime Lease
For a subtenant, the most important legal service a lawyer can provide is review of not only the sublease but also of the prime lease between its immediate landlord (the prime tenant) and the building owner landlord. A subtenant has no contract with the building owner landlord enabling the subtenant to occupy its space. A subtenant’s rights to the space are only as good as its sublandlord’s rights to that space. Therefore, reading the sublease alone is never adequate. The prime lease may contain time restrictions, use restrictions or form estoppels that are unworkable for the subtenant; not to mention that the prime lease might contain language causing it to terminate by its terms if the space is sublet!

2. Landlord’s Right to Approve
Most leases require a tenant to obtain written consent from its landlord before subleasing any portion of the tenant’s space. The landlord’s review right may be in its “sole and absolute discretion” (which translates as “arbitrary” or “no reason”), “reasonable discretion” or “conditioned” upon various specified circumstances. But no matter what, a landlord’s review always takes time. For a subtenant, it is critical to know (i) how much time a landlord has to review the proposed sublease (is it 15 days? 30 days? a reasonable period? unspecified?) and (ii) whether there are specific materials that the landlord will require to complete its review, such as documents demonstrating the financial strength of the subtenant, or a description of the subtenant’s proposed use, or a requirement that the initial tenant remain liable on the lease, to name a few possibilities.

No subtenant wants to be surprised at the end of a 30-day or 45-day waiting period with rejection by a landlord, well within its rights, for a reason that was not specified in the sublease but was stated rather plainly in the lease.

3. Financial Conditions of the Sublessor
While a sublessor in financial straits with too much space may be willing to offer bargain prices on rental rates just to lower its losses, the subtenant should consider the sublessor’s financial condition carefully. In a bankruptcy, a lease is an asset of the bankrupt estate. A bankrupt sublessor will have two lease assets: one lease upstream to its lessor and one lease downstream to its sublessee. Both these leases are subject to special treatment in the sublessor’s bankruptcy. A bankrupt sublessor spells complications for both the landlord and the subtenant.

4. Three-Way Conversation
While it may appear that the landlord can just approve or disapprove a sublease, the lease may contain a pass-through for legal fees the landlord can charge for review of a sublease. Some of these fees can be substantial; others are capped. Or it may be that the language of the lease is more favorable to a sublease and prohibits an assignment of lease. Or the sublease may specifically limit the uses of the space, the actions or remedies of the subtenant in the premises to what is permitted under the prime lease, and the sublessor may not be able to compel the landlord to cure its default under the sublease.

A performing subtenant without a documented non-disturbance with the landlord (or its lender) may find itself dispossessed of its space if the prime tenant defaults on the lease (or the landlord on its loan). Any of these circumstances could require the sublessor to intermediate between its landlord and its proposed subtenant during negotiation of the sublease, conveying messages and positions of those parties as all three parties negotiate to a conclusion.

5. Environmental Issues
Particularly in laboratory space where environmental contaminants may abound, it is essential that both the tenant and the subtenant take clear responsibility for their respective contaminants. No one wants to be responsible to the building owner landlord for someone else’s contaminants.

Although creating a simple and straightforward sublease document quickly and cheaply might be appealing, it is not the best idea. The above are only a few of the reasons it is always wise to engage knowledgeable commercial leasing attorneys familiar with the needs of and uses to which life science companies put their space, to check the prime lease and to tailor the sublease to meet the specifics needs of the parties. Despite everyone’s fondest wishes, a sublease takes more time and thought to produce properly than most people initially think.

For more information or any direct leasing questions, please contact Dorothea Dickerman at 703.712.5387 or [email protected].