It is not unusual for a landlord
and his tenant to mutually agree to terminate their lease.
The reasons are many. The tenant may no longer be able to
afford the lease payments, or he may need to move his business
location elsewhere. Sometimes the tenant agrees to pay a termination
fee or settlement to the landlord in order to avoid litigation,
and sometimes they just agree to terminate the lease without
a payment of any kind.
What happens if the tenant has subleased a portion of the
property to a third party? An example might be an office tenant
who has subleased a few office suites, or a retailer who has
subleased a little extra space to a small merchant or service
provider. Another example might be the subleases under an
"office suite" leasing arrangement where individual
offices are leased out to those needing an office and support
You might think that a mutual agreement to terminate the
master lease automatically terminates the sublease, since
the subtenant is claiming through the terminated master lease.
You might also think that the subtenant would be left only
with a claim for damages against the tenant (his sublessor).
If you had such a thought (even though it is quite logical),
you would be dead wrong!
The courts analyze the situation a little differently. They
say that when a tenant subleases a portion of his space, he
grants a portion of his leasehold estate to a third party.
Therefore, he cannot agree to terminate an estate he no longer
has. The result is that while a mutual agreement by the landlord
and tenant terminates the master lease, it does not terminate
the sublease. The subtenant may remain on the premises for
the duration of his sublease. This can be difficult for the
landlord if the subleases space is in the middle of a large
suite or in some other inconvenient location, or if he is
left with a checkerboard collection of office suite leases.
This is not the worst of it. Some courts have held that the
subtenant no longer has to pay rent! This based on an ancient
theory of real property law that the unqualified surrender
of the remaining term of the master lease, coupled with acceptance
by the landlord, merges the leasehold estate into the fee,
subject to the estate held by the subtenant. The result is
that the subtenant retains his subleasehold estate, and any
claim for rent by the landlord or the sublessor is extinguished
along with the termination of the master lease. Other courts
have adopted the more reasonable rule that the duty to pay
rent is impliedly assigned to the landlord under this circumstance,
or have developed a rule requiring the subtenant to pay rent
on grounds of fairness and equity. Since most courts have
yet to address this issue, in many jurisdictions the result
could go either way.
(Keep in mind that the above discussion refers only to terminations
by mutual agreement; unilateral terminations by the landlord
resulting from the tenant's breach do operate to terminate
What does this mean if you are a landlord? Fortunately, there
are a few lessons we may derive from this scenario:
- When Leasing: As a landlord, attempt
to negotiate a provision in your lease that you may withhold
consent to a sublease in your sole and absolute discretion,
without any requirement of reasonableness. If you can't
get that, attempt to negotiate a provision that says any
sublease must state that it terminates upon the termination
of the master lease, whether the termination is by mutual
agreement of the landlord and tenant or otherwise.
- When Consenting: If you are consenting
to a sublease, remember that you may be stuck with it if
the master lease is terminated. Try to make sure it is in
a location that will not prove troublesome if the master
lease is terminated, or negotiate a provision that you have
the right to relocate the subtenant upon termination of
the master lease.
- When Terminating: If you are negotiating
the termination of a lease, make sure there are no subleases;
but if there are, (a) try to make their termination a condition
of the termination of the master lease, or (b) at least
have your tenant assign the subleases to you (together with
an express assignment of the right to collect rent) before
you agree to the termination so that you can collect rent
even though you must honor the subleases.
The Last Resort: Finally,
if the sublease is a serious problem, don't agree to a
mutual termination. Wait for the tenant to default, and
then terminate the lease (or at least the tenant's right
to continued possession) for non-performance, which also
terminates the sublease.