|
View .pdf of this article
The changing business environment provides
abundant evidence of the need for tenant flexibility in real
estate planning. Store closings brought about by, mergers
and consolidations, corporate contraction in the face of profit
warnings, new business strategies, and the outsourcing of
functions that were once internal all cause the retailer to
focus on the disposition of excess or surplus property. On
the other side of the equation, new and expanding businesses
need space to house start-up and new operations. The ready
availability of excess space that is under lease, but not
used by another tenant creates opportunities for both parties.
These opportunities come with an accompanying set of issues
that must be considered in any analysis of the disposal or
acceptability of surplus space.
The
Lease Terms
It must first be determined that the
existing lease allows assignment or subletting under any circumstances.
If the lease is silent on the point, the law will generally
allow the tenant to assign the lease or sublet the premises.
Most modern leases address the tenant's right to assign or
sublet. These provisions must be thoroughly reviewed in preparing
for an assignment and subletting transaction and factored
into the negotiations with the replacement user and the landlord.
The clause will dictate who will have the bargaining power,
the landlord or the tenant, or in some cases the assignee/subtenant.
Tenants and landlords want to address
this balance of power at the outset of the lease transaction.
In the initial lease negotiations, the tenant will negotiate
for flexibility. National and regional retailers insist that
they have the absolute right to assign and sublet, or that
the landlord's approval rights be limited. The landlord, on
the other hand, wants the tenant's flexibility limited so
that landlord will determine who will be the occupants of
its property and what the appropriate tenant mix for the shopping
center may be. Without this control, the landlord may have
a tenant as a competitor leasing space to potential occupants
of the landlord's property.
If the parties are sophisticated and
expressly agree that the lease may not be assigned or the
tenant's interest sublet without the approval of the landlord
which may be withheld in the landlord's sole judgment, this
provision should be upheld. If, however, the lease provides
that the landlord's approval is required, which it impliedly
is the case in the absolute prohibition situation, many, but
not all courts(3),
will imply that such approval or consent may not be unreasonably
withheld.(4)
Thus, leases requiring the landlord's approval or consent,
and leases while requiring such consent and also providing
that such consent will not be unreasonably withheld have the
same legal effect.
Leases requiring the landlord to act
reasonably in granting or withholding approval may also specifically
outline standards that the landlord may employ or factors
that the landlord may consider in granting or refusing consent
to such transaction? For example, a landlord oriented lease
may provide:
Without in any way limiting Landlord's
right to refuse to give the consent required in this Section
___, Landlord shall be deemed to have reasonably withheld
its consent to any assignment or subletting if, in Landlord's
reasonable opinion:
A. The proposed use of the
premises by the assignee or subtenant is not compatible
with the operation of the Shopping Center or the desired
tenant mix of the Shopping Center, or would require that
increased services be provided by the Landlord;
B. The financial net worth
of the proposed assignee or subtenant is less than that
of the Tenant;
C. The proposed assignee or subtenant
is a governmental agency or an instrumentality of a governmental
agency;
D. The proposed assignment
or sublease would cause a violation of another lease for
space in the Shopping Center or would give an occupant of
the Shopping Center a right to terminate or cancel its lease;
E. The proposed assignee or
subtenant's use of the Premises would involve the introduction
of Hazardous Materials to the Premises;
F. The proposed assignee or
subtenant is a current tenant of the Shopping Center or
an entity with whom Landlord is negotiating to lease space
in the Shopping Center; or
G. The Tenant is in default
under any of the terms of this Lease as of the date that
Tenant notifies the Landlord of the proposed assignment
or subletting, or as of the effective date of the assignment
or subletting.
Even if the lease is not so explicit,
the tenant who seeks to assign or sublet must tender a suitable
subtenant or assignee who is ready, willing and able to assume
the lease,(5)
and give the landlord a reasonable period of time to evaluate
the proposed transaction.(6)
The landlord has the ability to determine that tendered assignee
or subtenant is a commercially reasonable substitute for the
original tenant.(7)
The determination of the acceptability
of the proposed subtenant or assignee may be based upon: the
financial responsibility and payment history
(8) of the tendered
party, including those who will enhance the credit of that
party by executing a guaranty or providing other security
for the party's performance;(9)
the type of business to be conducted
by the assignee or subtenant and whether
it competes with the business of the landlord or the other
tenants(10)
and whether the premises are suitable for the use intended
by the proposed transferee; the tenor of the enterprise to
be conducted at the demised premises, including the impact
upon the shopping center in which the demised premises are
located;(11)
whether the use of the premises by the subtenant or assignee
is legal and will be consistent with the uses permitted under
the use clause of the lease;(12)
and the character of the proposed assignee or subtenant.(13)
In many instances, the landlord's
decision will be based upon subjective factors. These unmeasurable
criteria may not be enough if the landlord's decision is challenged.
The landlord may have to demonstrate that it relied upon objective
factors or evidence, rather than its judgment alone in deciding
to withhold its approval of an assignment or sublease.(14)
In any instance, the landlord must focus on the intended transferee
or the transferee's use of the premises.(15)
The lease may set out a procedure
for the tenant to follow in seeking the landlord's approval
of a sublease or assignment. Some leases may require that
prior notice of the transaction proposed by the tenant be
given to the landlord. Other leases may allow the tenant to
assign or sublease at will, and merely notify the landlord
after the transaction is completed. If the lease provides
that the landlord must approve or consent to an assignment
or sublease, the lease may also require that certain information
be given to the landlord at the time that consent is sought
so that the landlord will have the information needed to make
an informed decision. As sample clause may read:
If Tenant desires to assign this
Lease or sublet the Premises or any part thereof, Tenant
shall submit to Landlord, not less than
(___) days before the proposed effective
date of the transfer:
A. A request for permission
to transfer setting forth the proposed effective date which
shall be no less than __________ (___) days after the sending
of such notice;
B. The name of the proposed
subtenant or assignee;
C. The nature of the business
to be conducted in the Premises after such transfer;
D. The terms and provisions
of the proposed agreement to assign this Lease or sublet
the Premises to such subtenant or assignee;
E. A copy of all proposed
documentation pertaining to the transfer;
F. Current financial statements
(audited, if available) of Tenant and the proposed subtenant
or assignee; and
G. Such additional information
that Landlord may reasonably request in order to enable
it to make a reasoned judgment.
The assignment provision of the lease
may require that the tenant give notice to the landlord some
time prior to the effective date of the assignment. If this
prenotice period is relatively short, perhaps ten to fifteen
days, it will not likely of itself disrupt the transaction.
If, on the other hand, the prenotice period is long, it may
well have the practical effect of precluding assignment or
subletting. Few prospective assignees or subtenants will be
willing to wait sixty, or in some cases, ninety days while
the landlord determines whether it will or will not consent
to the transaction. Potential assignees and subtenants do
not want to invest the time and money for feasibility studies
and legal and architectural consultations, let alone the executive
time, and forego other opportunities only to be met by a long
silence and possible rejection from the landlord.
This should not, however, prevent
the tenant and would-be assignee or subtenant from trying
to make a deal. Perhaps the landlord can be encouraged to
shorten the time for a decision. Landlords will not, however,
be willing to do this for nothing. The landlord will likely
want something to give up its right to ponder.
Perhaps the benefit to the landlord
will come by the tenant giving the landlord a share of any
bonus rental or compensation that the tenant will receive.
The proposed new occupant may bring some advantage from its
mere presence in the center. For example, if the proposed
occupant is a hot new retailing concept, restaurant or entertainment
venue that would heighten the visibility and paying traffic
of a shopping center, the landlord may well want to encourage
and facilitate, rather than frustrate the assignment. The
entre into the center of a new high-volume business may increase
the percentage rent paid to the landlord for the premises
and from other tenants. If this is the case, the bargaining
leverage may well shift to the tenant who has the favored
user in hand ready to add zest to a flagging center.
The lease review process must look
beyond the assignment and subletting clause to the other clauses
of the lease that affect the ability of the tenant to assign
or sublet. For example, the use clause may limit the use of
the premises to the business of the original tenant, rather
than allowing any lawful use. If that is the case, and the
landlord refuses to amend the use clause, the tenant is left
to assign or sublet only to a competitor, a step most will
be unwilling to take. Additional due diligence should include
a review of the use and restriction provisions of the reciprocal
easement and operating agreement, and other covenants, conditions
and restrictions affecting the shopping center as a whole.
These also may control the use of the premises, thereby restricting
the tenant's efforts to dispose of this surplus property.
Even clauses that set a high standard for the type of insurance
to be carried by the tenant may have a chilling effect, if
the proposed replacement user has a blanket insurance program
with an insurer of lower standing.
Some leases have other provisions
that impact a subletting or assignment in a subtle and less
direct manner. These constraints may be found in clauses that
permit only certain signage by the tenant, potentially preventing
the type of signs an assignee may require. The lease may limit
the number of doors to the premises, thus preventing a sublease
to a tenant that naturally wants its own main entrance and
storefront doors. Provisions that prohibit exterior renovations
may preclude an assignment to a user that requires a prototype
exterior, such as a theme restaurant.
The lease is both a transfer of an
interest in real estate and a contract. Typically, the tenant
will be liable to the landlord under the lease just as any
other contract. When a lease is assigned from the original
tenant to an assignee, the parties will enter into an assignment
and assumption agreement. Through this document, the lease
will be formally assigned to the assignee and the assignee
will assume and agree to perform the tenant's obligations
under the lease. Another contract is formed. Through the assignment
and assumption agreement the tenant's estate is passed to
the assignee and the parties agree upon the continuing liability
under the lease.
Different tenants focus on different
methods to achieve profitability. Some tenants have large
and valuable real estate portfolios. These real estate users
focus on enhancing overall corporate profitability by supplementing
operating income with gains from the disposition of surplus
real estate. Other tenants, while not eager to forego real
estate gains, focus on the profits of their core business.
If the retail philosophy changes for example by changing the
basic size of its stores, the retailer will often relocate.
Profiting from the resulting real estate termination does
not drive the transaction. Repositioning without loss is the
goal.
Landlords, by definition, are in the
real estate business. They profit by getting the maximum return
that the real estate can generate. Landlords typically do
not want their tenants as their competitors. For this reason,
landlords may include a recapture clause in the assignment/subletting
provisions, or provide that the landlord may not consent to
the assignment or subletting if the landlord has other or
comparable space available for lease.
Through the recapture clause, the
landlord can take back the space and lease it anew to a prospective
tenant, including a prospect brought to the deal by the existing
tenant's efforts. Obviously, the landlord will only exercise
this right if it can do so at a gain. If market rental rates
have increased since the making of the lease, as is likely
to be the case if the lease was executed in the late 1980s
or early 1990s, the landlord may well want to recapture the
space, terminate the existing lease and relet the space to
the prospect brought to the property by the existing tenant
at a rental rate higher than that paid by the existing tenant.
For the tenant focused on its core
business rather than real estate profits, this is an acceptable
result. Tenants should, however, negotiate with the landlord
to have their costs of the deal paid out of the excess of
the rent paid to the landlord by the replacement tenant over
the rent that would have been paid by the original tenant.
If the replacement user deals directly
with a landlord, tenant inducements will usually be negotiated.
The landlord will give a period of free rent, the cost of
some tenant improvements, and perhaps reimburse the tenant
for other costs to get the tenant into the project. These
costs are then included in the rent. Depending on market conditions,
the sublandlord or assignor will likely not give these inducements
to the replacement user. While a period of free rent may be
available to allow time for the refitting of the space, in
today's economy it is unlikely that the replacement user will
receive a tenant improvement allowance from the original tenant
or have the original tenant undertake to refit the space to
the assignee's specifications. This factors back to whether
the replacement user is getting a market deal.
If the lease is relatively recent,
market conditions may not have changed much. As a result,
the rent paid (and now sought to be received) by the original
tenant will include both the pure rent for use of the space
and a component designed to repay the landlord for the cost
of the tenant improvements given to the original tenant, improvements
that the replacement user will at least remodel, or perhaps
demolish. Thus, if the replacement user pays the same rent
that the original tenant is obligated to pay, the replacement
user will be paying the amortization of the original tenant's
improvements and often paying out of pocket for its own refurbishment
of the space. Will that arrangement result in the payment
of above-market all-in cost of the space for the replacement
user? This analysis must be made.
The rent paid under the lease includes
basic rent, adjustments such as contributions for landlord's
real estate taxes, insurance and operating expenses, and sometimes
percentage rents. While an assignor or sublessor may be willing
to give a short rent concession to allow the replacement user
to open for business before being obligated to pay rent, sometimes
that concession only relates to basic rent. Rent adjustments
or additional rent to reimburse the landlord for real estate
taxes and operating expenses may commence at execution or
shortly thereafter.
Percentage rents create a difficult
situation. The landlord is entitled to percentage rent based
upon the sales of whoever the space user may be. For this
reason, the original tenant will seek to receive from its
replacement the percentage rent that it must pay to the underlying
landlord. The replacement user may object if the percentage
rent factor is not appropriate for this type of user. Different
types of retailers operate on different margins. A percentage
rent that is appropriate for a lower volume but high margin
seller may be totally unacceptable to a lower margin, high
volume seller.
Generally the underlying lease is
taken as it is, with its economic terms. If the original tenant
and assignee or subtenant approach the landlord to try to
change those terms, the landlord may want some compensation
in exchange.
In the typical new leasing transaction,
tenant improvement costs are partially or totally paid by
the landlord and repaid by the tenant as part of rent. The
landlord is not part of the subleasing or assignment transaction
to pay these costs. Without the landlord, who else is available
to pay these costs? Only the assignor or assignee. Since the
assignor is not in the real estate business, it will not receive
a return on these costs other than the relief it obtains from
the cost burdens of the rent and other charges relating to
the surplus property. If the assignee pays these costs, it
may be paying more than the market rental value for the property,
unless the rent is below current market rates. Except for
those cases where the surplus property is a "bulls eye" location
for another retailer or is otherwise key to the assignee's
operation, leasing space directly from the landlord may be
a better economic alternative for a prospective tenant. This
economic reality makes assignment and subleasing economically
unattractive for many.
In making a new lease, a retail tenant
knows how long it will take to develop and mature its sales
in the market of the new leased premises. Other users have
a business plan that helps predict how long they will need
the space based upon projections of business expansion. The
assignee or subtenant typically takes the lease as it finds
it. Unless separate negotiations are conducted with the landlord,
whatever the balance of term there may be in the lease is
what will be available to the assignee or subtenant. If term
length is crucial, the tenant and assignee will have to make
a joint proposal to the landlord to recast to term of the
underlying lease. This of course shifts the leverage largely
to the landlord.
Options
to Renew
The potential taker of the space must
carefully analyze the remaining term of the lease, including
options. The first level of due diligence in this area is
to make sure that the options may be exercised by the assignee.
Because of the concessions made by landlords to highly creditworthy
national retailers, leases will sometimes provide that the
renewal right may not be exercised by an assignee or subtenant.
While the landlord may be willing to extend itself to the
national retailer or other high credit tenant to attract that
tenant to the property for the drawing power and prestige
associated with its presence, that star power may not be associated
with the assignee. Especially where the tenant has negotiated
for free assignability, the renewal of the lease may be personal
to the original tenant.
The sublease situation presents an
additional and different renewal term issue for the subtenant.
Typically, the subtenant is not in privity of contract with
the landlord, and therefor cannot exercise the renewal right.
Stated otherwise, the landlord is generally not obligated
to recognize the subtenant's exercise of the renewal option.
While the sublease itself may obligate the sublandlord to
exercise the renewal option at the direction of the subtenant,
what happens if the sublandlord breaches its covenant, or
perhaps cannot be found to exercise the renewal option that
is critical to the sublessee's operation at the premises?
One device that may be employed is
to make the subtenant the attorney in fact for the sublandlord
for the sole purpose of exercising and enforcing the renewal
rights given to the tenant under the lease. This appointment
is coupled with an interest and should be so stated and be
irrevocable. A sublease provision creating this attorney in
fact relationship follows:
If Subtenant notifies Sublandlord
of Subtenant's election to exercise an option to renew the
term of this Sublease and concurrently cause the renewal
of the term of the Lease, Sublandlord shall immediately
take all steps required under the Lease to exercise the
next option to renew the term of the Lease and provide to
Subtenant evidence of such exercise. If Sublandlord does
not exercise the next option to renew the term of the Lease
and provide Subtenant with evidence of such exercise within
____ (___) days after Subtenant's notice to Sublandlord
of Subtenant's exercise of such option to renew, Sublandlord
hereby appoints Subtenant as its attorney in fact, which
appointment is coupled with an interest and is therefore
irrevocable, to exercise such renewal option under the Lease
in the name, place and stead of the Sublandlord.
Alternatively, or perhaps as a suspenders
and belt approach to the protection of this valuable right,
if the subtenant is able to obtain an estoppel or nondisturbance
agreement from the underlying landlord as part of the subleasing
transaction, consideration should be given to seeking the
agreement of the landlord to recognize the exercise of this
renewal right by the subtenant. If the landlord is willing
to acknowledge the subtenant's rights in this regard, the
estoppel or nondisturbance agreement should so state and the
uncertainty will be greatly reduced for the subtenant.
While by its nature, the assignment
will confer upon the assignee the renewal terms available
under the lease, in the sublease situation, the lease term
and sublease term may not be symmetrical. It is frequently
the case that the sublease terms, both initial and renewal,
will not begin and end at the same time as the lease terms.
The sublandlord will want adequate
time to process the subtenant's renewal notice by making the
renewal notification to the underlying landlord. For this
reason, it is frequently necessary for the subtenant to give
the renewal notice four to eight weeks before the notice is
due to the underlying landlord. The subtenant will want evidence
that the sublandlord in turn gave the renewal notice to the
underlying landlord. Failing the receipt of that evidence
that the renewal notice has been given, the subtenant will
want time to react by giving its own notice to the landlord
either as attorney in fact for the tenant/sublandlord, or
pursuant to the recognition arrangement set out in the estoppel
or nondisturbance agreement between the subtenant and the
landlord.
From the sublandlord's perspective,
it is important that the time remaining in the initial and
renewal terms at end of the sublease terms is appropriate
to allow the premises to be vacated before the holdover penalties
apply under the underlying lease. Also, the sublandlord does
not want to have dead rent time at the end of the sublease
term when rent is not being paid under the sublease and rent
is to be paid under the underlying lease.
The sublessee has rid itself of the
financial cost of the surplus lease. It does not want to have
more of that cost in later years. Once the cost of the subleasing
transaction is booked, future operations should not be taxed
by later dead rent periods.
Nondisturbance
Agreements and Estoppels
Since the subtenant is in possession
of the space and the sublandlord is in an intermediary position
with direct privity with the landlord, the subtenant must
be certain that the sublandlord takes no action that will
prejudice the subtenant's rights. Most obvious is a termination
of the underlying lease. The landlord and tenant could freely
agree to terminate the lease. This event would have obvious
adverse consequences upon the subtenant's interest. For this
reason the subtenant should negotiate for a nondisturbance
agreement with the underlying landlord. Most leases, however,
do not require the landlord to engage in any such negotiations
or give any such protection to the subtenant. Indeed, many
landlord's will not cooperate in this effort and will not
give either the sublandlord or the tenant any document or
agreement that is not required by the express terms of the
underlying lease.
Typically, the assignee will only
agree to assume the lease liability accruing after the assignment,
and will not agree to be responsible for any pre-assignment
defaults. While this may be the agreement of the assignor
and assignee, it is not binding upon the landlord. If there
are preassignment defaults by the assignor, the landlord can
resort to all of its rights and remedies under the lease and
applicable law. To guard against that possibility, the assignee
will often obtain an estoppel certificate from the landlord.
Through the estoppel, the assignee has the comfort that the
landlord will not claim the existence of a pre assignment
tenant default. Some leases at least require the giving of
a generic estoppel certificate, or the landlord may be willing
to give a very bland estoppel if a request is made by the
tenant. At a minimum, the subtenant or assignee wants certain
information confirmed. First, it must be confirmed that the
lease with which the parties are dealing is indeed the correct
lease, with all amendments, and that such lease, as amended,
is in full force and effect. The taker of the lease also wants
to know that there are no pending defaults under the lease,
or if so what those defaults may be. The assignee or subtenant
would like to receive a simultaneous copy of any notices given
by the landlord to the tenant.
If possible, the sublessee/assignee
would like to have the estoppel confirm other information,
such as the length of the term, its commencement date and
termination date, the number and length of extension options,
the time within which notice of the exercise of an extension
option is to be given, the amount of rent, taxes, CAMs and
other costs payable by tenant, and the date through which
such amounts have been paid. Some subtenants would like to
go further to rewrite the lease through the estoppel, by modifying
or excising offensive provisions. Landlords understandably
resist these efforts, unless there is some benefit to them
of opening negotiations with the successor occupant of the
premises.
Estoppel certificates may seek the
landlord's knowledge of certain facts. For example, an estoppel
may ask the landlord to state whether it knows of any pending
or threatened litigation, including eminent domain or building
code matters, relating to the property, and whether the property
is contaminated with hazardous substances. Landlords are reluctant
to give these statements, especially, those relating to environmental
matters or the condition of the premises. The estoppel can,
however, be used to change the notice address to the tenant,
and to obtain the landlord's agreement to accept a notice
of renewal or extension from the assignee or subtenant, if
the notice is otherwise given in conformity with the requirements
of the lease.
An example of an estoppel for a sublease
transaction follows.
ESTOPPEL CERTIFICATE
________ ___, 200_
____________________________ ("Subtenant")
____________________________
____________________________
Re: Lease ("Lease") dated as of
_______ __, ____ made by and between __________________________________________________
("Landlord") and _________________________________
("Tenant") as amended, modified or supplemented by
______________________________ (collectively the "Lease")
relating to the property commonly referred to as ____________________,
____________, ________, and which is part of a shopping
center (the "Shopping Center").
Ladies and Gentlemen:
Subtenant has entered, or is contemplating
entering, into a Sublease Agreement (the "Sublease")
with Tenant, under which Subtenant will sublease the premises
demised by the Lease, as more particularly described in
the Sublease (the "Premises"). It is a condition
to Subtenant's obligations under the Sublease that Tenant
obtain this Estoppel Certificate. To enable Tenant to satisfy
such condition, and for other good and valuable consideration,
Landlord hereby certifies to Subtenant as follows:
1. Landlord has not assigned or
otherwise transferred its interest as landlord under the
Lease, except as described above.
2. The initial term of the Lease
commenced on _________ __, ____, and will expire on ________
__, ____.
3. The Tenant has ____ options
to renew the term of the Lease each for a period of ____
years.
4. The Lease as described above
constitutes the entire agreement of Landlord and Tenant
with respect to the Premises, is true, correct and complete,
has not been modified or amended, and is in full force and
effect.
5. Tenant has commenced payment of
monthly fixed rent under the Lease and such rent has been
paid for the period ending on _______ __, ____.
6. Landlord is not in default
in its obligations under the Lease, and to the Landlord's
knowledge, there are no defaults of Tenant under the Lease
and to the Landlord's knowledge there are no existing circumstances
which with the passage of time, or the giving of notice,
or both, would give rise to a default under the Lease.
7. To Landlord's knowledge, no
hazardous or toxic waste, substance or material, or contaminants,
oil, pesticides, or radioactive materials have been generated,
stored, handled or otherwise dealt with on the Premises.
8. Landlord has not received any
written notice of any pending or threatened litigation,
including eminent domain proceedings, relating to the Premises
or the Shopping Center, and Landlord has no knowledge of
any state of facts that could result in such litigation.
9. Concurrently with the giving
of any notice to Tenant Landlord shall give a copy of such
notice to Subtenant at the address set forth above.
The certifications contained herein
are made in the knowledge that Subtenant, as a prospective
subtenant of the Premises, will place substantial reliance
thereon.
Very truly
yours,
________________________,
a
__________________________
By: _______________________
Its: _______________________
The subtenant should, attempt to have
the landlord agree to give to the sublessee or assignee copies
of all notices that are given to the tenant, and agree not
to terminate, amend or modify the underlying lease without
the subtenant's prior written consent. This protects the foundation
upon which the sublease is built.
Leases typically give the tenant the
ability to terminate the lease upon the happening of events
beyond the control of the parties. Examples of such right
are found in the casualty and condemnation clauses. If, for
example, the premises are materially damaged, or more than
an inconsequential amount of the premises are taken by eminent
domain, the tenant may be able to terminate the lease. Especially
in the subleasing situation, the tenant's natural reaction
to such an event or opportunity would be to exercise its termination
right, thereby eliminating any further possibility of liability
to the landlord.
The subtenant is in a different situation.
Presumably, the subtenant is conducting its business operations
at the premises and may want to continue to do so. If there
is a material damage to the premises as a result of a casualty,
or a taking of a material part of the premises, the subtenant
wants to control the decision of whether or not the lease
should be terminated. To prevent the termination of the underlying
lease without the subtenant's approval or participation in
the termination decision, the sublease must limit the sublandlord's
ability to act. The sublandlord should agree to give any notices
it receives from the landlord to the subtenant, and to not
take any action to amend, modify or terminate the underlying
lease without the subtenant's prior written approval.
Since the assignee's or subtenant's
rights are derivative of the rights of the tenant under the
underlying lease, the assignee or subtenant must confirm the
exact nature of those rights. This is typically done through
the use of a simple device, the estoppel certificate requested
from the landlord.
The first question to be considered
is whether the landlord is required to give an estoppel. Many
leases do not require the landlord to do so. Institutional
and sophisticated heavy users of space, knowing that subleasing
and assignment are possible, build this requirement into their
form leases. Even if the landlord is not required to give
an estoppel, the tenant's request for one may be honored,
if the requested estoppel is not aggressively drafted.
Typically, the subtenant is not in
privity of estate with the underlying landlord. The subtenant's
rights are through the sublessor. Since there is no direct
relationship between the landlord and the subtenant, and the
subtenant's rights are built upon the sublandlord's rights
as tenant under the lease, the subtenant will loose its rights
if the underlying lease terminates for any reason. As a result,
a subtenant will want a direct contractual relationship with
the underlying landlord to continue its tenancy under the
terms of the sublease if the underlying lease should be terminated.
This is accomplished through a nondisturbance and attornment
agreement entered into between the subtenant and the underlying
landlord.
Through this device, the landlord
agrees to recognize the subtenant's rights under the sublease
if the tenant's rights under the lease should be terminated,
or if the underlying lease should terminate. This protects
the subtenant from the loss of its possessory rights if the
underlying lease is terminated because of a default by the
tenant or for some other reason, without the subtenant's consent
or approval. Of course, the subtenant must not be in default
under its obligations under the sublease, and the landlord
will typically not want to be responsible for the prior defaults
of the sublessor under the sublease. Even with its shortcomings,
the nondisturbance agreement is an essential part of any sublease
transaction, if it can be obtained. Leases may not require
the landlord to give the NDA, and because it substantially
impacts upon the landlord's rights in the event of the termination
of the underlying lease, landlord's are reluctant to enter
into this agreement without some consideration.
The assignment and subleasing situation
is the only alternative that the tenant seeking to rid itself
of surplus lease obligations can utilize, short of buying
its way out of the lease or disaffirming the lease in bankruptcy.
That there is a market for these transactions is evident by
the thousands of leasehold dispositions occurring annually.
*****************************************************
1. This article
first appeared in Retail Law Strategist, March 2001, published
by The International Council of Shopping Centers, 1221 Avenue
of the Americas, New York, NY 10020-1099, (646) 728-3800;
Commercial Leasing Law & Strategy, March 2001, published
by Law Journal Newsletters, 345 Park Avenue South, New York,
NY, 10010, 1(800) 888-8300). It is reprinted with permission.
2. The author
wishes to acknowledge the assistance of Chad Walker, an associate
in the Chicago office of Arnstein & Lehr.
3. Johnson
v. Yousoofian, 930 P.2d 921 (Wash. App. 1996).
4. James C. McLoughlin,
Annotation, When Lessor May Withhold Consent Under Unqualified
Provision in Lease Prohibiting Assignment or Subletting of
Leased Premises Without Lessor's Consent, 21 A.L.R.4th
188 (1983). There is a relationship between this legal principal
and the obligation of a landlord to mitigate damages upon
a tenant's default. 735 ILCS 5/9-213.1. If the tenant was
to default and tender a subtenant to the landlord, landlord
may be obligated to accept the tendered tenant in mitigation
of the defaulting tenant's damages. See Scheinfeld v.
Muntz TV, Inc., 67 Ill.App.2d 8, 214 N.E.2d 506 (1966);
Wohl v. Yellen, 22 Ill.App.2d 455, 161 N. E. 2d 339
(1959).
5. Vranas
& Associates, Inc. v. Family Pride Finer Foods, Inc.,
147 Ill.App.3d 995, 498 N.E.2d 333 (1086); Jack Frost
Sales, Inc. v. Harris Trust and Savings Bank, 104 Ill.App.3d
933, 943, 493 N.E.2d 941 at 949 (1982).
6. Losurdo
Brothers v. Arkin Distributing Company, 125 Ill.App.3d
267, 465 N.E.2d 139 (1984).
7. Jack Frost
Sales, Inc. v. Harris Trust and Savings Bank, 104 Ill.App.3d
933, 946, 433 N.E.2d 941 at 950 (1982).
8. Regent
v. Dempsy-Tegler & Co., 70 Ill.App.2d 32, 216 N.E.2d
500 (1966).
9. Jack Frost
Sales, Inc. v. Harris Trust and Savings Bank, 104 Ill.App.3d
933, 433 N.E.2d 941 (1982).
10. But see
Edelman v. F.W. Woolworth Co., 252 Ill.App. 142 (1929).
11. Jack Frost
Sales, Inc. v. Harris Trust and Savings Bank, 104 Ill.App.3d
933, 433 N.E.2d 941 (1982).
12. See Toys
"R" Us, Incorporated v. NBD Trust Company of Illinois,
904 F.2d 1172, 1176 (7th Cir. 1990) (which notes
that a permitted use does not prohibit other uses, unless
words of limitation are used).
13. Mowatt
v. 1540 Lake Shore Drive Corporation, 385 F.2d 135 (7th
Cir. 1967).
14. See Ernst
Home Center v. Sato, 80 Wash. App. 473, 910 P.2d 486
(1996) (landlord withheld consent to the assignment of a lease
to a second hand clothing store).
15. Julian
v. Christopher, 320 Md. 1, 10, 575 A.2d 735, 739 (1990).
See generally, Milton R. Friedman, Friedman on
Leases, §7.304c (1997).
Raymond J. Werner, Esq.
Arnstein & Lehr
120 S. Riverside Plaza, Suite 1200
Chicago, IL 60606
Ph: (312) 876-7152
Fx: (312) 876-0288
Email: rjw@arnstein.com
© 2001 American Bar Association
To return to this issue's table of contents, click below
E-Dirt
Table of Contents
|
