What is a Commercial Sublease Agreement?
A sublease is an agreement between a tenant (lessee) of a commercial property to lease a portion or all of the property to another party. The party that leases the property from the landlord is known as the master tenant. Subleases can come with various limitations on what can be leased. The sublease must still comply with the terms and conditions of the master lease and the landlord’s rules and regulations .
Texas real estate law defines a commercial sublease agreement as a contract between the master tenant and a third party (that is not the landlord) whereby that third person becomes a subtenant with a privity of estate relationship with the original lessor. A Texas commercial sublease is an agreement governed by the Texas Real Estate License Act, which requires all real estate brokers and real estate sales agents (license holders) acting in the subletting of interests in real property to be licensed in the state of Texas. The license holder must employ the honest and fair disclosure standards during each transaction to the best of their ability.
Important Elements of a Texas Sublease Agreement
The core elements of a commercial sublease agreement generally include the following:
Identifying Information
First, the sublease should clearly identify all parties involved. This includes the original tenant and any subtenant(s). The street address or other location information of the property should also be included.
Terms of the Agreement
Next, the sublease should contain all of the terms of the lease. This includes:
For the parties’ own protection, it is best to use a written document whenever possible, even when the sublease is for a relatively short period of time, such as through the end of the month. This is true even if the sublease agreement will not be registered with the county.
Consent of the Landlord
Almost all commercial sublease agreements contain language concerning whether the landlord (property owner) has consented to the agreement. Failure to receive consent from the landlord could result in the termination of the original lease, meaning both you and your subtenant could be removed from the property.
Security Deposit
The sublease document should contain information about the security deposit amount (which may or may not equal the security deposit you paid when you signed the original lease).
State-Specific Information
While the basic components of a commercial sublease document are generally the same no matter where you are, certain states require specific information as well, like the presence of a lead paint disclosure. Seek professional guidance so you do not run afoul of the law.
Legal Stipulations for Subleasing in Texas
Texas state laws surrounding subleasing are generally alluded to in the wording of the Commercial Lease. In almost all commercial leases, you will find a clause that states that subleasing is not allowed without the written consent of the Landlord. In some cases, the clause also says that you cannot do an assignment without their written consent. So, basically, if they don’t want you to sublease, they can disallow it in the lease terms. This, however, does not mean that talking to your Landlord or the professional that you had negotiate the Commercial Lease and ask them to make you an exception, will not be worth the effort! On the flip side of the equation, the Tenant also has rights. Most likely, you have invested a lot of money in improvements to the space and/or custom fixtures specific to your business needs. If this is the case, the Landlord would probably not want you to leave your space, so s/he may be a little more amendable to your request. Either way, some landlords and their brokers are more willing to negotiate than others, so it is best to be up front about your intentions. However, if you try to sneak in a sublease without getting consent from the landlord, you run the risk of being evicted (and losing any investment you made in the space). Due to the fact that subleasing is so broadly addressed in a commercial lease, I always recommend to my clients that they have a lease review done by a Commercial Real Estate Broker who understands these clauses and how to best navigate them.
Pros and Cons of a Sublease
Sublease can provide both short-term and long-term solutions to space restraints in commercial property. However, the drawbacks of subleasing are not insignificant. For sublessors, subleasing can offer a short-term solution to space limitations. The benefit of subleasing is that the sublessor may retain some ability to move back into the space at the end of the sublease term. However, sublease with its associated liabilities can be a big risk for sublessors who do not engage in appropriate due diligence. Sublease can have a long-term effect on the landlord-tenant relationship. If the sublessee becomes insolvent or bankrupt during the term of the sublease, the sublessor may be unable to satisfy its rental obligations to the landlord. The sublessor may also be stuck with an unanticipated liability to a third-party sublessee that has no sublease to rely upon. The risk is exasperated if the sublessor subleases without permission from landlord.
For sublessees , the sublease can be a real bargain, particularly in a falling property market. In a falling property market, sublease rentals can be real bargains, especially when the sublease term exceeds the lease term of the landlord/sublessor. An experienced sublessor may be able to hold the landlord to the market rental while passing on those holdings to a sublessee at a bargain rental rate. But not always. For one thing, even in a down market, the landlord may contact the sublessee directly, in which case sublease rental negotiations may come to naught. Furthermore, landlords grew tired of the tenant v. landlord litigation over the liability of the sublessor for the acts of the sublessee. The subortage form of sublease solves some of those problems while giving both the landlord and the subaclasee some protection. It is important to keep in mind that the sublessee may be stuck with a rental obligation if the sublease is rejected during the sublessor’s bankruptcy proceeding.
How to Negotiate a Sublease Successfully
Successful negotiatation of a commercial sublease agreement in Texas, whether you are the Initial Tenant or prospective Subtenant, can be accomplished by following the steps outlined below. In order to ensure a successfully negotiated deal, both the Initial Tenant and the prospective Subtenant must focus on and consider the following:
- Initially, the parties must negotiate and finalize the underlying lease between the Initial Tenant and the Landlord. The provisions and terms of the underlying lease should be considered and addressed in the commercial sublease.
- Next, determine the desired rental amount to be paid by the Subtenant to the Initial Tenant. The rental amount will likely be based on the rental amount being paid by the Initial Tenant to the Landlord. Therefore, review the underlying lease and determine the terms and provisions regarding rental payment from the Initial Tenant to the Landlord. Negotiate the rental amount with the Initial Tenant to establish an agreement that is acceptable to all parties.
- Focus on length of term and any renewal or extension provisions. Is the proposed sublease term the same length as the underlying lease term? Consider whether to request a longer or shorter sublease term than the underlying lease term.
- Subtenant must examine the underlying lease for any conditions or restrictions that may impact the use of the sublease premises. Ensure that the uses of the sublease premises listed in the underlying lease are consistent with the intended uses and activities of the Subtenant.
- Subtenant must examine the initial Tenant’s rights and obligations listed in the underlying lease. Consider the Initial Tenant’s obligations and duties and whether any specific requirements apply to these obligations and duties under the terms of the sublease.
- Determine any provisions to be included in the sublease with respect to the Initial Tenant’s rights as "tenant" under the underlying lease. Will the Initial Tenant maintain the obligation to pay rent to the Landlord or will this obligation be passed on to the Subtenant? Will the Initial Tenant’s rights to re-enter the premises and terminate the sublease be expressly set out in the sublease?
- The parties must negotiate any other terms that may be affected by the underlying lease. Does the Initial Tenant have the right to assign the premised to an assignee in the event that the Initial Tenant acquires an assignee? Does the Initial Tenant have the first right of refusal or option to purchase the premises? Will the Initial Tenant be required to return the premises to the Landlord in as good a condition at the time of the lease commencement? Will the Initial Tenant be allowed to make alterations and improvements to the premises?
- To ensure a successful and legally compliant sublease transaction, both the Initial Tenant and the Subtenant should work with an attorney to review and negotiate any issues or disputes that may arise related to the underlying lease and the proposed sublease.
How to End a Sublease Agreement
The process to terminate a commercial sublease agreement will depend on the original lease between the landlord and the tenant. The tenant may only be able to terminate a sublease agreement subject to the original lease and landlord restrictions. In many cases, the tenant is not required to give the landlord any notice of termination; however, the tenant should check the original lease to determine if he/she is required to provide a notice of termination to the landlord. Also, the tenant should check the commercial sublease agreement to determine whether a provision allows the tenant to terminate the sublease agreement at any time.
Some commercial sublease agreements may require that the tenant elect a remedy upon termination. This means that the tenant must choose a specific remedy upon termination . The most common remedies include: The tenant may also have other remedies available. The best way to determine if a tenant has a choice of remedy upon termination is to carefully read the commercial sublease agreement. One thing to note about a potential remedy is that the tenant will have to choose it in writing and it may have to be delivered to the landlord. If there are any questions, the tenant should consult an attorney for advice.
If the tenant terminates the commercial sublease agreement subject to the terms of the original lease, then it will not have a potential legal liability to the landlord. However, if the tenant terminates the commercial sublease agreement in violation of the original lease, then it may potentially be liable for the landlord’s damages.