5 Dangerous Lease Clauses- Part Two

In a typical lease negotiation, the parties, the attorneys and the brokers focus only on the key financial aspects within the lease document.  However, there are subtle and seemingly innocuous clauses that can cost the tenant a pretty penny long after the lease has been signed.  Here’s a quick list of 5 Dangerous Lease Clauses:

1. Usage Clause
2. Sublease Clause
3. Holdover Clause
4. Subordination and Non-disturbance Agreement (SNDA)
5. Repairs and Maintenance

2.  THE SUBLEASE CLAUSE

When tenants and even their attorneys are negotiating to get into a space, they typically don’t focus on how to successfully get out of the space- but is something important to think about.

For example, suppose an insurance company takes down 20,000 sq. ft. of office space.  At $25/ sq. ft., a five-year term lease would cost $2.5 million without any operating expenses.  Also suppose that a year after making this lease commitment, the insurance company merges with another and finds they have redundant office locations.  However, the landlord knows full well that this tenant is good for the remaining four years of the lease ($2 million!) and isn’t about to release this tenant from that obligation, especially during this recessionary period when vacancy rates are high.

We represented one of our insurance company clients in a lease with a major New York landlord.  You can only imagine how creative his attorney was in coming up with devices that would effectively negate the tenant’s ability to sublease the space and mitigate a potential loss- the sublease clause was five pages long!  However, we were able to protect our client and ensure the ability to sublease should it be needed.  These are the things we paid special attention to in the Sublease Clause:

• Prohibitions against the tenant from soliciting subtenants, adjoining tenants, tenants within the building or even tenants within other buildings that the landlord owns.  I’ve seen attorneys wiling to give on this point for the sake of horse-trading on another.  Your broker should know that the most logical future sublease tenant is an adjoining tenant or someone within the same building.

• Prohibitions against the tenant soliciting any potential tenant that the landlord is negotiating with.  This would be someone coming from the outside who is looking at your building amongst many others.  A good tenant representation specialist wants to avail clients of all of the choices within a candidate building.  For example, we just saved one of our clients, a household name insurance company, $2.1 million over the direct landlord’s price by securing a 6.5 year sublease.

• No time limit in which the landlord must respond back to you with an approval of a subtenant.  We often see this “standard” Lease Clause statement- “the landlord will not unreasonably withhold consent of a sublease.” Well, there’s nothing within that statement that says how long the landlord has to provide you with this consent!  Any good broker will tell you that when you have a good, credit-worthy tenant, speed is critical in concluding the transaction.  If there is no time limit set in the Sublease Clause, it is conceivable that a landlord could purposely drag their feet on the approval while you watch your potential subtenant conclude a deal with another hungry landlord.

Bottom line? In YOUR next lease negotiation, someone better be watching out for the Sublease Clause…