Commercial Tenants: Reminder to Review Your Sublease Clauses

In this article, you’ll learn:

• The crucial role of a well-negotiated sublease clause for corporate tenants.
• The rise in sublease space and its impact on landlords.
• A recent legal case highlighting issues with sublease clauses.
• Key points for tenants to review in their lease agreements.

Without the protection of a good sublease clause, a lot of corporate tenants would be lost right now.

Because on the event of the unexpected, a weak clause makes it difficult, if not impossible to sublease your property.

So, the sublease clause has been first and foremost in the last few years in a landscape where many office spaces are underutilized. It offers an added layer of protection and flexibility for tenants, allowing them to mitigate risks and make the most of their leased space.

Yet, the very significance of the sublease clause also makes it a potential pitfall if not handled with care. A current legal battle involving a major Manhattan landlord, Durst, underscores this fact. The property owner is suing its tenants to block their sublease right. This case serves as a wake-up call for corporate tenants to meticulously evaluate and comprehend the sublease clause in their leases. By understanding its complexities, tenants can proactively protect their interests and ensure the clause aligns with their needs.

The Sublease Boom is Running Landlords Out of Business

Sublease space is taking over the office market, doubling in volume since pre-pandemic numbers. As of Q1 2023, there's a notable 189 million Sq. Ft. of sublease space up for grabs, representing about 19% of the overall office availability. This marks a considerable jump from Q1 2020, when around 96 million Sq. Ft. of sublease space was available, making up about 13% of the total office availability.

About half of this sublease space is sitting vacant, draining nationwide office valuations and bottlenecking the supply.

And with so much cheap, empty space on the market, landlords have to significantly reduce their profit margin by getting more competitive to lure in long-term tenants. Because not only are they competing against other landlords but tenants as well.

Obviously, this has stunted their business and forced them to take on more debt than many can carry. The cycle of businesses cutting their footprints and putting the space on the market at a fraction of the price is forcing many landlords to decide whether it’s time to hand back the keys of their properties.

The Importance of the Sublease Clause

The sublease clause was always important, sometimes knows as one of the most dangerous lease terms for commercial tenants to be aware of.

For tenants, creating a strong sublease clause is one of the most effective ways to protect your company’s interests moving forward. Because leases are often long-term and there’s no telling what could happen in the span of a 10-year lease (from internal personnel cuts, to how about a global pandemic?)

A properly negotiated sublease clause ensures you weather the storm, mitigating any loss from necessary portfolio downsizing. As such, the pressure is on tenants (and their representatives) to skillfully review the clauses for shifty language written for the landlord’s bias. Because leases are often drafted by landlords (or their brokers) and tenants are unfortunately placed on the defense. Certain stipulations hidden in your lease can make it difficult, if not impossible, to exercise aspects of your lease you thought you had a right to.

That is why it has always been critical to proactively review and negotiate for what works for your interests as a tenant. Because before enacting the sublease clause, the tenant must receive written consent from the landlord. 

Even more pressure is applied on the importance of properly defining your sublease clause because of the sheer volume of sublease space flooding the commercial market. Landlords are becoming increasingly careful about how they write sublease clauses, driven by the boom’s cataclysmic effect on the valuation office rents. And they have the ultimate veto power for you exercising your sublease (well, if they have a legal basis).

And now, landlords are fighting back…One major landlord is coming out swinging against tenants attempting to sublease within its building, and it is using the language of the sublease clause as a platform for a legal battle to stop the subleasing. Talk about a reminder to review your clauses.

Landlord Sues to Stop Tenants Sublease

In a recent legal move, One Bryant Park LLC, an affiliate of Durst that owns the Bank of America Tower at One Bryant Park, has filed a lawsuit against Bank of America and Akin Gump Strauss Hauer & Feld, a law firm and fellow tenant in the same tower. The legal action, filed in New York County Supreme Court, stems from Akin Gump's intention to sublease a floor to Bank of America within the building. Durst contends that this sublease plan violates the terms of their leases.

Akin Gump, which initially leased 200K SF across six floors in 2006 and renewed for 280K in 2019, sought permission from Durst in June to sublease the 46th floor to Bank of America. However, Durst rejected this request, claiming that the original lease of the law firm prohibits subleasing to other tenants in the building if Durst offers "comparable space" now or within six months.

Additionally, the lease disallows renting space to a party with whom the landlord is actively negotiating. Durst asserts that it has offered Bank of America the entire 48th and 49th floors, which will become available within six months. 

So, this is a special case. There is a certain conflict of interest being dealt with here and not every tenant will run into this issue when attempting to sublease. It does appear that Bank of America was attracted to the Akin deal because they can inhabit more of the same building with the hefty discounted sublease rate. So of course, the landlord isn’t happy.

Watch the Language of Your Sublease Clause

But regardless, this case should stand out to tenants because it is a reminder that the language of your sublease clause can give your landlord a platform to protest. A lot of this claim weighs on the vague meaning of “comparable” space which the tenant is fighting. Like mentioned, this is a unique issue, but tenants do frequently run into legal issues over vague terminology that landlords can take advantage of.

For example, many sublease clauses will denote that the landlord must extend prior approval in a timeline that is not “unreasonably delayed.” But what does “unreasonably delayed” mean? Your landlord may have an entirely different definition of this term than you. 

That is why it is critical to specify the number of days your landlord has to grant approval. If not, you could find yourself in a costly and time-consuming legal battle to determine exactly what qualifies as “unreasonably delayed.”  

Carefully Review Your Lease Clauses

Sublease clauses are generally filled with nuance. Corporate leases in general are tricky for tenants to deal with because if not careful, the language of one clause can even implicate the use of another.

While not highlighted in this case, tenants should also be aware of how their sublease rights are implicated by usage details. The usage clause is another top dangerous lease term.

Neglecting to carefully review and understand it can lead to challenges during your tenancy. It has the potential to restrict your flexibility in key areas such as who you are allowed to sublease your space to.

For instance, if you are a law firm and your lease specifies that the office’s use is for that, you can only sublease your space to other law firms. This limits your net of prospective tenants to an extremely small pool, thus complicating your ability to exercise the clause.

So, make sure you pay special attention to your usage clause, or it may come back to bite you in a way you didn’t expect. Because when finding a new tenant or sub-tenant in this environment is already so complicated, you really don’t want to limit your prospective pool even further.

Commercial Tenants: Stay on Top

To ensure your lease clauses are in your favor, it's prudent to seek guidance from experts who specialize in tenant representation. A True Tenant Rep™ possesses the acumen to meticulously review lease clauses, protecting your interests and preventing potential conflicts. By partnering with professionals who are dedicated to your success, you can navigate the world of commercial leasing with confidence, knowing that your lease agreements are sound and strategic.

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