You found the perfect location for your business and are now in the process of negotiating a sublease with the sublandlord, who is an existing tenant of the property. What should you consider?
Your leasing arrangement will be governed not only by the sublease that you negotiate with the sublandlord, but also by the head lease currently in place between the sublandlord, as tenant, and the head landlord as well as any required consent agreement with the head landlord. It is important to review all these agreements and ensure that they work cohesively and that there are no contradictions or ambiguities when the agreements are considered collectively.
You should review the head lease to determine whether the sublandlord is allowed to sublease the premises to you and whether the head landlord’s consent is required. Where consent is required, it is crucial that you and/or the sublandlord obtain clear written consent to the sublease from the head landlord. If the head landlord’s consent is required but not obtained, or if the head lease does not permit the sublandlord to sublease the premises, then your sublease may be void.
It is also important to review all other terms of the head lease in detail as the sublease will be subject to the terms of the head lease, although the sublease can in some cases limit a subtenant’s obligations to a certain extent (in which case it is imperative that the subtenant obtains the head landlord’s written acknowledgement of any such limitations in its consent). Consider whether there are any tenant obligations or other terms in the head lease, such as an early termination right granted to the head landlord, that would pose a problem for you. Note also that there will be no privity of contract between you and the head landlord, meaning that you cannot enforce the tenant’s rights under the head lease against the head lease. Consider adding a provision to the sublease obligating the sublandlord to enforce its rights under the head lease against the head landlord, when you so request, in the event that the head landlord defaults under the head lease.
The sublease itself should set out the following provisions, among others:
- Term of the sublease.
- Whether the whole of the leased premises or only a portion of it is being subleased.
- How access to the subleased premises will be dealt with if only a portion of the leased premises is subleased.
- Whether you and the sublandlord will share any common areas if only a portion of the leased premises is subleased.
- Rent that you will pay to the sublandlord.
- Permitted use of the subleased premises.
- If the head lease is a net lease (where operating costs, realty taxes and/or other fees are charged in addition to fixed rent), what proportion of the operating costs, realty taxes, and other fees allocated to the leased premises and charged by the head landlord to the sublandlord will you be responsible for.
- Your maintenance and repair obligations, as well as end-of-term restoration obligations, if any.
- Whether you can alter the subleased premises.
- Whether any rights of extension or renewal are granted to you. Consider whether you should include a clause requiring the sublandlord to use its best efforts to exercise its own rights of extension or renewal under the head lease if you so request.
- Requirement for the sublandlord to comply with its obligations under the head lease. Default by the sublandlord may lead to termination of the head lease by the head landlord, which would in turn terminate the sublease.
In sum, the subleasing process involves multiple parties and a number of different documents. The process can be complicated. A thorough review of the documents will enable you to understand your obligations in your leasing arrangement and how the documents interact with one another. Turning your mind to the considerations outlined above can also assist in minimizing your liability.
If you have any questions about commercial real estate transactions in Ottawa or Ontario, please don’t hesitate to reach out to a member of our Business Law or Commercial Real Estate team.
This blog post was written by Marina Abrosimov, a member of the Business Law team. Marina can be reached at 613-369-0363 or at [email protected].
