Author: Aaron Weiner This post originally appeared on Insights and is republished with permission. Find out how to blog with us on theBrokerList.
Lease Intelligence
Don’t Leave The Most Complicated Lease Transactions To The Amateurs
If you follow commercial real estate trends, you may have noticed that one of the most dramatic effects of the pandemic shut down was that millions of square feet of office building sublease space flooded the Los Angeles market. By some measures, at it’s peak it nearly equaled the unleased vacant office space in the region. That is unheard of.
In a sublease, the contract is between the tenant and the subtenant. Neither of these parties negotiate and document leases for a living, yet here they are, trying to memorialize one of the most complex and legally precarious lease transactions. To begin with, virtually all leases state that the landlord must approve of the sublease transaction and sign off on it. So a
sublease is more like a love triangle where the interests of all parties must be served or there is no love to triangulate.
For example, both the original tenant and the landlord are concerned with the subtenant’s financial strength and their proposed use of the premises. The larger issue is around the payment of rent. The subtenant pays the tenant and the tenant continues to pay the landlord. But what if the tenant stops paying? Be sure the sublease provides that the subtenant is kept
apprised of any defaults of the tenant and is getting credited for their payments to the tenant. I have been called many times by subtenants who were blind sighted (and ultimately evicted) as a result of the tenant not paying the landlord and pocketing their money. That rip off scenario doesn’t exist in a traditional direct lease between the tenant and the building owner.
I just finalized a sublease where the subtenant (my client) was in the cannabis industry and flush with cash. They got this very desirable space in West Hollywood because they offered to pay all of the rent due under the sublease up front, nearly half a million dollars. This was clearly an unusual situation and we had to negotiate wording that insured the subtenant was protected in
the event the tenant defaulted and the landlord sought to get the subtenant out of the building. It wasn’t all that complicated but the concepts were novel to some of the parties and a lot of hand holding was necessary. In the end, we got it done.
The moral of the story is never, NEVER attempt to negotiate and document a sublease without the help of a seasoned tenant rep broker. Without professional guidance, a sublease could quickly flip your financial standing from sublime to submerged.
Do you have your own lease challenges that you would like to discuss? Feel free to call me directly or send me an email.
Aaron Weiner, CCIM, CPM, LEED AP
[email protected]
(213) 258-6921
