Stuck In the Middle:

Transcription

1 Stuck In the Middle: The Upside and Downside of Being a Sublandlord David J. Weiner Liskow & Lewis 1001 Fannin, Suite 1800 Houston, Texas HBA Real Estate Section January 20, 2016

2 Introduction Sublease vs. Assignment AmcoTrust, Inc. v. Naylor Look at: Extent of Interest Transferred Retention of Reversionary Interest Privity of Estate/Contract Release from Liability Not likely in either instance Reversionary Interest vs. Administrative Expense

3 Introduction (cont d) Why Sublease? Mitigation (Rent; Continuous Operations) Lack of Immediate Need for Space Economic Gain (Sublease Rent > Lease Rent) Franchisor Context

4 Selected Sublease Issues Landlord Consent; Recapture Rights Premises Permitted Use; Operation of Premises Sublease Term; Extension Options Sublease Rent Maintenance and Repairs Role of Prime Lease and Prime Landlord Events of Default Remedies Indemnity and Insurance Casualty and Condemnation Surrender Obligations Leasehold Financing Subordination, Non- Disturbance and Attornment Environmental Obligations

5 Consent to Sublease Standard of Consent TEXPROP. CODEs Tenant may not rent leasehold without the prior consent of landlord Default = Sole and Absolute Discretion : No duty to consent other than to mitigate after abandonment If no consent is to be required must be explicit Permitted Transferees? Reasonable Consent not to be unreasonably withheld, delayed or conditioned.

6 Consent to Sublease (cont d) Lease Subject to Master Lease (i.e., ground lease) Need for consent from both landlord and owner Most stringent standard among all documents Considerations in Sublease if Consent Not Yet Obtained Common in large, multi-site deals Acknowledge that consent has not yet been obtained Release sublandlord from liability Keep sublease in effect despite lack of consent Termination as sole remedy for either party upon final judgment in favor of landlord

7 Recapture Rights Recapture Rights Landlord s Right to Retake Leased Premises Economic Benefits to Landlord Attempt to Limit Scope/Triggers for Recapture Effect of Request to Sublease Should negotiate right to withdraw request

8 Premises Entire Premises Relatively easy to pass through (most) obligations May reference lease for subtenant s obligations Partial Sublease Impact on scope of subtenant s rights/obligations Example: subleasing portion of tenant s entire floor Impact on maintenance obligations

9 Permitted Use; Operation of Premises Permitted Use Different Use Landlord consent required? Exclusive use rights granted to other tenants? Tenant mix concerns Franchisor context limit to franchisor s brand Continuous Operations Covenants Carry over similar covenant to sublease Performing subtenant / non-performing tenant

10 Sublease Term Coterminous with Lease Term Timing of Surrender / Avoidance of Lease Default Sublandlord s Removal of Own Property/Alterations Reduce Term to Avoid Appearance of Assignment Shorter Than Lease Term Impact on Recommencing Operations in Premises Continuous Operations Covenants Effect of Termination of Lease

11 Extension Options Deadlines for Exercising Options 120 days prior (when lease deadline is 90 days) 30 days prior to deadline under Prime Lease Must Tenant/Sublandlord Exercise Its Option? Be careful when allowing subtenant to dictate Expressly address whether subsidies carry over Fair Market Value Rent (FMVR) Under Lease Spell out when determined after exercise of option If sublease rent is fixed, may lead to unwitting subsidy If not, require upfront consent to FMVR from subtenant

12 Sublease Rent Base Rent Sublease Rent vs. Lease Rent (profit vs. subsidy) Other ( non-rent ) Consideration Percentage Rent Gross Sales definition should be consistent ALWAYS have alternative minimum rent Timing/basis of calculation Prior year? Two months prior? Sales Reporting Requirements Sublandlord has no control over subtenant s books/records Limit Sublandlord s obligations/liability

13 Sublease Rent (cont d) Additional Rent (CAM, Taxes, Insurance, Etc.) Building Rent Splitting into separate building and ground rent Allows different acceleration Security Deposit Holdover Rent Avoid subsidy of subtenant s holdover Should be no less in sublease than in lease greatest of (a) 150% of monthly rent, (b) [fair market rental value] and (c) holdover rent in Prime Lease

14 Sublease Rent (cont d) Does Landlord share in excess Sublease Rent? 100% = counter-productive (no incentive) Is Landlord s share based on grossor netamount? What costs can sublandlord exclude? Leasing commissions, marketing, TI allowance, etc. When does sublandlord recover those costs? On the front end? Proportionately?

15 Maintenance and Repairs Coordination of Responsibilities Stand-Alone Building Part of Multi-Tenant Property Office Building Space Signage Franchisor context Who owns branded signage? Removal/retention of signage

16 Role of Prime Lease and Prime Landlord Sublease Subject and Subordinate Pass Through All Obligations Under Prime Lease Excluded Obligations Inherently capable of performance only by sublandlord Payment of base rent (if sublease rent is different) Confidentiality of Prime Lease terms Retain All Rights Under Prime Lease Options ROFRs

17 Role of Prime Lease and Prime Landlord (cont d) Recognition Agreements Modification of Prime Lease Retain right to modify without subtenant consent To extent subtenant not materially impacted Transfer/Sale of Premises by Prime Landlord Avoid being sandwiched between subtenant and affiliated landlord Retain right to terminate upon certain transfers

18 Events of Default Timing of Notice and Performance Need gap between notice and performance Subtenant gets shorter cure periods Cover All Defaults under Lease Additional Defaults Not Covered by Lease Cross-Defaults

19 Rights and Remedies All Rights and Remedies Available to Landlord Additional Remedies Not Covered by Lease Higher default interest rate/late fees Security Interest in Subtenant s Property All rights and remedies, at law or in equity Coordinate Exercise of Remedies

20 Indemnity and Insurance Indemnity Obligations of Subtenant Same as under lease, plus other sublease liabilities Carve-outs (tenant s prior operations) Environmental existing vs. exacerbation Insurance Requirements At least same coverages required under lease Increased coverage for additional risk Creditworthiness of subtenant Waiver of Recovery and Subrogation May want waivers between landlord and subtenant

21 Casualty and Condemnation Casualty and Duty to Restore Condemnation and Right to Proceeds Rent Abatement Termination Rights Materiality threshold Partial sublease What is a substantial portion?

22 Surrender Obligations Surrender Obligations Under Lease Additional Alterations by Tenant/Sublandlord Retention of Right to Perform Ownership and Removal of Signage

23 Leasehold Financing Prohibitions Against Encumbering Leasehold Financing needs of subtenant Right to encumber leasehold in lease Subordination Agreement from Sublandlord Versus waiver Rights of lender (cure, removal of property) Obligations of lender (rent/storage fee) Waiver of interest in property after certain period Subordinate to terms of lease

24 Subordination, Non-Disturbance and Attornment Subordination To landlord and sublandlord mortgagees Attornment Non-Disturbance Respective rights under lease vs. sublease Sublease non-binding on mortgagees Commercially reasonable efforts only

25 Environmental Obligations If vague/ambiguous in lease: Clearly spell out obligations in sublease Stringent obligations on subtenant based on risk If clearly spelled out in lease: Pass through obligations to subtenant Retain right to perform, charge to subtenant Control of remediation efforts