August 2014

Sublease or Release

A tenant may find they have outgrown the industrial/commercial real estate space during their course of leasing a building or business may have deteriorated.  Therefore, they must relocate.

I frequently counsel tenants on available options in the case where they must relocate.  The ability for the Tenant to negotiate a release based upon the remaining obligation under the original lease is obviously the best scenario; however, the recession has caused most Landlords not to release the primary tenant due to the fragility of the rental market.

In order to negotiate a release, the tenant usually must have a replacement tenant who will agree to enter directly into a new lease with the Landlord. If the new tenant is financially stronger and will agree to pay a higher rent, then there is a strong possibility for the primary tenant to be released.

The negotiation may be easy if the Landlord wants nothing to do with his former tenant, and the former tenant is financially troubled.

On the other hand, tenants have a right by law to sublease their premises, and the Landlord cannot unreasonably withhold consent.  The Landlord does have the ability to approve the use of the premises and the financial condition of the prospective replacement tenant.

The master tenant remains primarily liable for the performance of the subtenant after a sublease is granted. The master lessee is in a precarious position as a guarantor with no control as to the actions of the subtenant.

Under short term subleases it is advisable for the Master Tenant to pay anywhere from 40-60% upfront for granting his release. It sounds steep at first but in the end it might be the best deal the former tenant could possibly make.

My advice where a sublease is the only option available for the Master Tenant is to make sure of two important provisions:

1.  The replacement tenant should make rental payments directly to the Landlord.

2.  Create an obligation upon the Master Landlord to provide notice in writing immediately to the Master Tenant of any default or breach of the lease by the new tenant.

At this time, we have a new real estate market which is busy and deals are being made. Therefore, the tenant who needs to sublease his space will have a greater opportunity to negotiate a release or at least not be on the hook for the entire remaining term with smart negotiations.

“Lee Segal is very professional, honest and trustworthy. His experience as an owner of commercial real estate gives him a real depth of understanding that is valuable to his clients. In this industry, there can be a lot of hype, but Lee is the type of person who gives advice, not according to what he thinks is best, but based on what he believes will be best for his clients and their interests. I look forward to working with him again in the future.”  
Dr. Neil Fond