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Landlord Can Take a Hit When Lease Voluntarily
Terminated If Space Has Been Subleased

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.

Subtenants
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 services.

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.

The Shocker
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 all subleases.)

The Lessons
What does this mean if you are a landlord? Fortunately, there are a few lessons we may derive from this scenario:

  1. 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.

  2. 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.

  3. 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.

  4. 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.
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