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A tenant should readily accept a restriction which prevents them from subletting a partial space (as opposed to the entire leased premises).
A landlord should not be concerned with including a restriction that the tenant cannot advertise the subletting of their space below that of the rent provided for in the lease.
A landlord’s initial lease draft should contain language stating that the term of any sublease or any renewal or extension thereof shall not extend beyond a date one (1) day prior to the expiration or earlier termination of the term provided for under the lease itself.
A landlord’s initial lease draft should contain language specifically requiring landlord’s consent prior to a tenant subletting the premises or assigning its lease.
A landlord should not worry about its initial lease draft containing language which provides that the tenant is prohibited from negotiating an assignment or sublease with anyone the landlord has negotiated with, or shown space to, over the prior six (6) to nine (9) month period.
If there is language in the subletting and assignment clause that tenant can’t negotiate to assign its lease or sublet its space to any party who landlord has negotiated with or shown space to over the last six months or to any current occupants of the building, the tenant should include language indicating that the landlord must notify tenant within a specific amount of time from the tenant’s request (e.g., five (5) days), whether the potential subtenant or assignee has in fact been in contact with the landlord in the recent past or if in fact they otherwise occupy space in the building.
Landlords should include language in the lease that requires that tenant’s proposed assignee or subtenant be a person or entity which has a financial standing and character consistent with the standards of the landlord’s building.
A landlord should agree to a sublet or assignment without requesting the prospective subtenant’s or assignee’s financials, as it is the tenant’s task to assess the same.
Landlords should include language in their initial lease draft stating that any sublease agreement may provide that by its terms, the sublease may be further modified (including, without limitation, modification of the financial obligations, identity or character of the subtenant), without landlord’s consent.
If a landlord is going to consider consenting to a partial sublet of a tenant’s entire space where such space is going to be separately demised, the lease should provide that any portion of the premises proposed to be sublet shall not comprise less than twenty-five percent (25%) contiguous square feet of area and shall be of a shape or configuration such that both the area proposed to be sublet and the remainder of the premises shall, in landlord’s judgment, constitute commercially marketable space as separate rental units.
Tenants and their representatives should attempt to include a reasonable financial cap on its reimbursement to landlord for landlord’s outside counsel fees in reviewing the sublet/assignment request.
A tenant should never expect to receive any of the compensation paid by sublessee over and above the rent payable under the lease, as landlord is always entitled to any profits received on its property.
The landlord should include as broad language as possible when defining as many allowable deductions by tenant in determining a tenant’s profit from a sublease or assignment.
In regards to the sharing of profits from subletting or assigning with a landlord, a tenant should attempt to include attorney, broker, accountant, architect and engineering fees, along with any other concessions granted or work provided to the subtenant or assignee (such as free rent concessions, improvement allowances and any construction costs) as part of those deductions allowable when determining net profits to be shared.
In the event of an assignment, landlords should attempt to expand the definition of consideration paid to tenant that the landlord is entitled to share in to include “key money” for the sale of the lease, as well as sums paid for the sale, rental or use of tenant’s furniture, fixtures and equipment.
With regards to profit sharing in an assignment and subletting clause, generally, it is more important for an office tenant where the landlord provides a turnkey build-out than for a retail tenant where the landlord provides little or no contribution in the way of a tenant improvement or landlord’s work to secure language that (i) excludes tenant’s unamortized costs of its furniture, fixtures and equipment and improvements from the definition of consideration that landlord is entitled to share in, (ii) sets a cap on the amount of profit landlord is entitled to share in, and/or (iii) excludes any profit received from an assignment.
Use restrictions and a landlord’s right to recapture and/or leaseback are not among the items that landlords need to ask (and tenants need to secure carve-outs) for in the assignment and subletting clause of a lease.
In a well drafted assignment and subletting clause, the landlord should include use restrictions, specify a profit sharing arrangement, have a recapture or leaseback right, and wherever possible, dictate that landlord will be entitled to a rent increase of 5% to 10% on almost any assignment or sublet.
In the event that the landlord within the lease conditions a sublet or assignment on a rent increase of 10%, a tenant should (i) delete the provision, (ii) seek to reduce the potential rent increase by a lower amount (e.g., 5%), and/or (iii) make the provision non-applicable in the event of an assignment or sublet to a related entity or in respect to a bona fide sale or acquisition of a tenant’s assets or business.