How to Evaluate a Sublease Before You Sign

A sublease looks like a small lease, but it is a different kind of agreement. Your contract is with the existing tenant, called the sublandlord, and not with the building owner. The sublandlord can only pass along rights it holds under its own lease, called the master lease or prime lease, and it cannot give you anything the master lease forbids.

That means three documents decide what you are getting, not one:

• The master lease between the landlord and the sublandlord, including every amendment.
• The sublease between the sublandlord and you.
• The landlord's written consent to the sublease, which often adds conditions of its own.

Most problems we see in subleases come from reviewing the second document carefully and the other two lightly. The order of review should be the reverse.

Ask for the complete master lease at the start, before you spend time on a floor plan. A sublandlord may redact the rent and other economics, which is common and usually acceptable. What you need are the operating terms, because most subleases incorporate them and make you responsible for complying with them.

• ✓What is the permitted use, and does it cover what our team will actually do in the space?
• ✓What do the alterations provisions allow, and whose approval is needed for cabling, access control or a small server closet?
• ✓What are the building hours, and how is after-hours heating and cooling requested and billed?
• ✓What does the master lease say about subleasing: consent standard, recapture right, and any sharing of sublease rent?
• ✓What must be removed or restored at the end of the term, and does any of that fall on us?
• ✓Are renewal, expansion or termination rights personal to the original tenant, so they do not pass to a subtenant?
• ✓What counts as a default, and how much time does the sublandlord have to cure one?
• ✓Does the landlord hold a termination right that could end the master lease early?

Pay particular attention to the last two. If the master lease ends for any reason, the sublease generally ends with it unless the landlord has agreed otherwise. Your attorney should read the master lease alongside the sublease and tell you which of its obligations you are taking on.

Nearly every office lease requires the landlord to approve a sublease. Treat consent as a condition of the deal, not a formality to handle after signing. Ask the sublandlord how the master lease describes the consent process, what the landlord will want from you (typically financial information and a description of your business), and how long the landlord is allowed to take. Build that review period into your move date.

Read the consent form itself. Landlord consent documents often state that the landlord has no obligations to the subtenant, that the subtenant must comply with the master lease, and that the consent does not release the sublandlord. Some add requirements such as insurance certificates naming the landlord or a fee for the landlord's review.

The protection worth asking for is a recognition agreement, sometimes called non-disturbance. In it, the landlord agrees that if the master lease terminates because of the sublandlord's default, the landlord will recognize your sublease and let you stay, usually on the sublease terms or the master lease terms. Landlords do not always grant this. They are more receptive when the subleased space is a full floor or a self-contained suite, when the sublease rent is close to what the landlord would otherwise expect, and when the subtenant is a company the landlord would want as a direct tenant.

If the landlord will not sign a recognition agreement, ask for at least a copy of any default notice sent to the sublandlord and the right to cure it yourself. That gives you a warning and a chance to act.

In a direct lease, the landlord evaluates your credit. In a sublease, you also need to evaluate the party above you, because your occupancy depends on the sublandlord continuing to pay rent on the master lease for the whole sublease term.

Start with why the space is available. A company that consolidated into a larger office is a different risk from one that is shrinking under financial pressure. Neither rules out the deal, but the second calls for more protection.

• Ask for financial information on the sublandlord, the same way a landlord would ask you.
• Ask whether the sublandlord is current on rent and whether it has received any default notices under the master lease.
• Confirm who holds your security deposit and under what terms it comes back. A deposit held by a struggling sublandlord is harder to recover than one held by a building owner.
• Consider asking that you may pay rent directly to the landlord if the sublandlord misses a payment, with credit against your sublease rent.
• Ask the sublandlord to represent in the sublease that the master lease is in full force and that it will not amend or terminate it in a way that affects you.

A sublease priced well below a direct deal can still be the right choice. The discount is partly compensation for these risks, so decide whether the protections you were able to negotiate justify it.

Furnished sublease space is a real advantage for a team that wants to move quickly. It is also where loose assumptions turn into disputes at the end of the term. Get the specifics in writing.

• Attach an inventory of the furniture, fixtures and equipment that will stay, ideally with photographs.
• State whether you are borrowing the furniture for the term or taking ownership, and if ownership, at what point it transfers.
• State who must remove the furniture when the sublease ends. Owning it can mean paying to dispose of it.
• Confirm which cabling, access control hardware and audiovisual equipment remain, and whether any of it is leased from a vendor.
• Clarify that you are responsible for restoring only your own alterations, not the work the sublandlord installed before you arrived.
• Walk the space with whoever will manage your IT, and test the items you are relying on before you sign.

Subleases are usually offered as-is. If you need changes, such as added meeting rooms or a secured room for equipment, ask early whether the sublandlord will contribute and whether the landlord will approve the work. Both answers affect the value of the deal.

The sublease cannot run past the master lease, and in practice it usually ends slightly before it so the sublandlord can surrender the space on time. Compare the remaining term with your growth plan. A short remaining term suits a team that expects to outgrow the space anyway. It is a poor fit if you would be spending real money on improvements you will leave behind.

If you might want to stay, raise it with the landlord before you sign, not near the end. Some landlords will discuss a direct lease that begins when the sublease ends, or at least confirm they would entertain one. Others already have plans for the space. Knowing which situation you are in changes how much you should invest.

Ask how holdover works too. If you stay past the sublease expiration, you can make the sublandlord a holdover tenant under the master lease, and most subleases pass that cost back to you.

1. Request the full master lease and all amendments before touring a second time.
2. Confirm the remaining term, the use clause and the consent process fit your needs.
3. Review the sublandlord's financial condition and its reason for subleasing.
4. Negotiate the business terms in a short term sheet, including furniture, deposit and any improvement contribution.
5. Ask the landlord for consent and for recognition rights at the same time, not in sequence.
6. Have your attorney review the sublease, master lease and consent as one package.
7. Do not release funds or schedule movers until the signed landlord consent is in hand.

Tenant Advisory Group represents tenants in subleases as well as direct leases, and we compare the two side by side so the discount on a sublease can be weighed against what a landlord would offer directly.