CAN I SUBLEASE MY COMMERCIAL SPACE IN VIRGINIA? WHAT YOU SHOULD KNOW
Our Virginia real estate lawyers at the law firm of Fox and Moghul receive several queries regarding subleasing of commercial space. With the current economic and health problems in the country, businesses may consider sharing a commercial space with another business to reduce their costs. Whether you are a prospective Sub-Tenant or the Sub-Landlord, the process and considerations are similar.
Vetting / Examination of the Main or Primary Lease
The Primary Lease is the agreement between the fee owner or the property to the Primary Tenant. This document may consist of several amendments and assignments, all of which must be examined by your attorney to determine if your new Landlord or Sub-Landlord’s rights to lease or sub-let the property are legally enforceable.
Is a Sub-Lease Permitted
The Primary Lease will contain a section regarding assignments or Sub-Leases. Most will indicate that if permitted it will be necessary to acquire the written permission of the Primary Landlord. There will be a non-refundable fee for review of the prospective Sub-Tenant’s application. That application will be a complete financial and experience profile that the Primary Landlord will examine prior to granting a Sub-Lease. This right of the Primary Landlord is ‘within its sole discretion’, though the additional words ‘which will not be unreasonably denied’ if the Primary Lease was carefully negotiated by the Primary Tenant.
Is the Use Permitted
In most commercial leases, there is a definition of the limited permitted use of the leashold. More often this is seen in a strip mall or shopping center, where the types of businesses have been carefully selected to promote traffic and non-competition between the stores within the space.
Consequently, if you are the Primary Tenant and your permitted use is a sports apparel store, it is probable that any Sub-Tenant’s business must fit within the ‘use’ category as defined in the Primary Lease.
Liability for Defaults
In a sublease, the sub-landlord remains primarily liable for payment of all base rent and additional rent, required periodic reports to the landlord and every element of the Primary Lease. Therefore, if the Sub-Tenant defaults, the Landlord may hold the Primary Tenant liable.
The Primary Tenant’s Sub-Lease should include an indemnification clause that ensures the Sub-Tenant indemnify Sub-Landlord for any damages incurred from a violation of the terms of the Primary Lease.
Whether you are negotiating the Primary Lease or the Sub-Lease, you should negotiate some limitation on your liability in the event of default. The standard language in a commercial lease makes the defaulting Tenant/Sub-Tenant liable for all current and remaining base and additional rent, brokers fees, re-construction of the space, advertising. However, some Landlords will consider limiting the liability to a fixed amount or a fixed number of month’s rent. Always attempt to negotiate the limit of liability in the event of a default.
If you are not a major national chain, but rather a small family owned LLC, the Primary Landlord or Sub-Landlord may require that the principals executing the lease/Sub-Lease, execute a personal Guarantee. This provides the rights of the Primary Landlord Sub-Landlord to acquire judgments against the principals personally and seize those personal assets such as their homes and personal property. Therefore, it is vital that the terms of this instrument be modified to also limit the liability in the event there is a default.
Shared Profits with Landlord
It is not unusual for a commercial lease provide that the Primary Landlord be paid a percentage of the sub-rent paid to the Sub-Landlord. We have seen this amount to require that all profits made by the Primary Tenant be paid to the Landlord but in some cases it is limited to a percentage of the profits, such as 50% over the amount paid to the Sub-Landlord.
Whole or Partial
Whether you are sub-letting only a portion of the space included in your Prime Lease with the Landlord, all of the above considerations and processes must be followed. This includes providing explicit floor plans showing the area to be sub-let.
Additional Considerations for a Sub-Tenant.
As the Sub-Tenant, you should ensure that you know the extent of your rights including access, parking, shared utilities, and signage.
Find an Experience Commercial Lease Attorney
The firm of Fox & Moghul has extensive experience in negotiating commercial leases between multi-national corporations and family owned LLCs, we encourage you to contact us before considering a commercial lease or sub-lease.
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