Subleasing commercial space is a common strategy for tenants who need to downsize, consolidate locations, or exit a space before the lease expires. It is also one of the more legally complex transactions in commercial real estate, because the sublandlord (the original tenant) remains fully liable to the landlord under the master lease while simultaneously managing a new landlord-tenant relationship with the subtenant.
Before entering into a sublease -- whether as a sublandlord seeking to offset rent or as a subtenant seeking below-market space -- a thorough review of the master lease is essential. This checklist covers the key items.
1. Confirm Assignment and Sublease Consent Requirements
Almost every commercial lease requires landlord consent before the tenant can sublet the premises. The standard varies significantly by lease: some require "sole discretion" consent (the landlord can say no for any reason), while others require consent not to be "unreasonably withheld, conditioned, or delayed" (NWCD standard).
What to check: Find the subletting provision in the master lease. Identify the consent standard (sole discretion vs. NWCD). Note any specific grounds on which consent can be withheld even under an NWCD standard -- many leases allow the landlord to withhold consent if the proposed subtenant is a current tenant in the building, a governmental agency (for certain property types), or a business that competes with other tenants in the complex. Confirm the landlord's response timeline for consent requests, and whether silence equals approval after the deadline passes.
2. Identify Subletting Restrictions
Beyond the consent requirement, leases frequently contain substantive restrictions on who the tenant can sublease to, how much space, and for what term.
What to check: Review the lease for restrictions on:
- Use. Can the subtenant operate a different use than the permitted use in the master lease? Many leases restrict subleases to the same permitted use, limiting the pool of potential subtenants.
- Term. Is the sublease term limited to less than the master lease term? Some leases prohibit subleases that extend beyond the master lease expiration. Others prohibit subleases that cover the final year of the master lease term.
- Percentage of space. Some leases prohibit subleasing more than a defined percentage of the premises (e.g., more than 50%) without triggering the landlord's recapture right.
- Affiliate exception. Does the lease contain an exception allowing subletting to affiliates or related entities without landlord consent? This can be important for corporate tenants restructuring through internal reorganizations.
3. Review the Landlord Consent Process and Timeline
The landlord's consent process has practical implications for the sublease timeline. A landlord who has 30 days to respond to a consent request, with an automatic approval after 30 days if no response is received, is very different from a landlord who has 60 days with no deemed-approval provision.
What to check: Identify the exact process the lease requires for submitting a consent request -- what information must be provided (subtenant identity, financial statements, proposed sublease terms), how it must be delivered (to whom and by what method), and what the landlord's review period is. Confirm whether there is a deemed-approval provision if the landlord does not respond. Build the consent timeline into your sublease negotiation so you can represent accurately to the proposed subtenant when the deal can close.
4. Check Whether the Landlord Has Recapture Rights
A recapture provision gives the landlord the right to terminate the master lease (or the portion of the premises being subleased) in response to the tenant's sublease request, effectively taking back the space rather than consenting to the sublease. This can be devastating to a sublandlord who has already negotiated a sublease and is relying on the sublease income.
What to check: Find the recapture provision in the lease. Identify the circumstances that trigger the landlord's recapture right (typically, any sublease request above a defined percentage of the premises), the scope of the recapture right (the entire premises or just the subleased portion), and the timeline for exercising it. If recapture is a risk, the sublandlord should structure the sublease negotiation to minimize exposure -- for example, by seeking a waiver of recapture rights as part of the consent process, or by structuring the transaction as an assignment rather than a sublease if the economics allow.
5. Compare Master Lease Term to Proposed Sublease Term
The sublease cannot extend beyond the master lease expiration date. If the master lease has one year remaining and the proposed subtenant wants a two-year term, the deal cannot be structured as a sublease -- it would require an assignment, and the sublandlord would need to be released from the master lease.
What to check: Confirm the master lease expiration date. Confirm any renewal options available to the sublandlord and whether those options can be passed through to the subtenant. If the sublandlord intends to exercise a renewal option to create additional sublease term, confirm the renewal notice deadline has not passed and that the option is exercisable under the current circumstances (some options terminate if the premises have been sublet).
6. Review Sublease Rent Versus Master Lease Rent
The relationship between the sublease rent and the master lease rent has two important implications: the potential profit to the sublandlord and any contractual restrictions on that profit.
What to check: Identify whether the master lease contains a profit-sharing provision. Many institutional landlord leases require the sublandlord to share any sublease profit (the excess of sublease rent over master lease rent, net of subleasing costs) with the landlord -- typically 50%. If a profit-sharing provision exists, calculate the after-sharing economics before finalizing the sublease rent. Also confirm what costs can be deducted before calculating the profit -- allowable deductions typically include brokerage commissions, tenant improvement costs, and legal fees related to the sublease.
7. Confirm Subtenant Credit Requirements
The landlord's consent process typically includes a review of the proposed subtenant's financial qualifications. Many leases give the landlord the right to withhold consent if the subtenant's credit is materially inferior to the sublandlord's credit at the time the master lease was signed.
What to check: Review the lease's credit standards for sublease consent. Prepare subtenant financial statements early in the process -- landlords typically require two to three years of audited financials or tax returns, a bank reference letter, and sometimes a credit report. If the subtenant's credit is marginal, consider proposing a security deposit or personal guarantee as part of the consent package to preempt a credit objection.
8. Review Sublease Liability (Sublandlord Remains Liable)
This is the most important structural reality of a sublease: the sublandlord is not released from the master lease by subleasing the space. The sublandlord remains directly liable to the landlord for all master lease obligations -- rent, maintenance, compliance -- regardless of whether the subtenant performs.
What to check: Confirm the master lease has no provision releasing the sublandlord upon sublease. Design the sublease agreement to provide maximum protection against subtenant default: security deposit or letter of credit, clear remedy provisions, and notice and cure rights. Understand that if the subtenant stops paying rent, the sublandlord must continue paying the landlord under the master lease regardless.
9. Check Sublease Restrictions on Alterations
The master lease may restrict what alterations the subtenant can make to the premises. If the subtenant needs to reconfigure the space, any restriction in the master lease on alterations also binds the sublandlord -- and by extension, the subtenant.
What to check: Review the alterations provision in the master lease. Identify the landlord's approval rights, the restoration obligations at lease expiration, and any restrictions on structural modifications. Confirm that any alterations the subtenant requires are permissible under the master lease, and factor the cost of restoration into the sublease economics if restoration will be required.
10. Review Holdover Provisions
If the subtenant fails to vacate the subleased premises at the end of the sublease term, the sublandlord may be in a holdover situation under both the sublease (sublandlord's obligation to the subtenant) and the master lease (sublandlord's obligation to the landlord if the holdover forces the master lease into holdover).
What to check: Review the master lease holdover provisions -- typically, holdover rent is charged at 150% or more of the last month's rent, sometimes 200%. Confirm the sublease contains matching holdover protections: the subtenant must vacate before the master lease expiration, and holdover by the subtenant triggers an indemnification obligation to cover the sublandlord's increased holdover rent exposure under the master lease.
Building a Sublease Analysis From an Abstract
A complete lease abstract is the starting point for every sublease analysis. The sublandlord needs to know -- with precision, not approximation -- the master lease expiration, the consent requirements, the recapture rights, the profit-sharing formula, the alteration restrictions, and the holdover provisions before any sublease negotiation begins.
Discovering a landlord recapture right after the sublease letter of intent has been signed wastes time, damages the sublandlord's relationship with the proposed subtenant, and may require renegotiating the deal from scratch. A thorough review of the master lease abstract before initiating the sublease process is the most efficient risk management available.