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In this article, we discuss (1) a subtenant’s concerns when completing leasehold improvements on subleased premises; and (2) other pertinent issues subtenants should be aware of when entering into a sublease situation.
Issue #1:
What are the concerns regarding a subtenant completing leasehold improvements on subleased premises?
It may be helpful to add an example to clarify what is a fixture. If a leasehold improvement can be removed without damaging the structure or violating the terms of the lease, the tenant or subtenant has the right to remove it when he or she leaves. For example, the owners of a spa could opt to take their hot tubs, saunas, and body treatment equipment with them, stripping the space so that it looks like it did originally. On the other hand, if a tenant or subtenant installs an air conditioning or heating system on the premises, removing the system would very likely damage the structure, and so the leasehold improvement is considered the property of the landlord.
Obviously, then, the concern at this stage is determining the subtenant’s ability to own the improvements he makes to a premises. Depending on the nature of the improvements, the subtenant will have to establish up front with the sub-landlord and the landlord, ownership to any and all improvements.
Issue #2:
What are the typical concerns for a subtenant entering into a sublease situation?
A landlord’s waiver of subrogation (i.e., an agreement from the landlord’s insurance company not to sue the party causing damage to the insured) and release of liability, if any, pursuant to the master lease should also apply to the subtenant. A master lease typically includes a provision in which the landlord limits its liability under the master lease to its equity interest in the property, and further states that the landlord is not liable for injury to the persons or property of the tenant. The landlord also seeks to exclude its liability for the tenant’s consequential damages. Subtenants should try to exclude all of these provisions from a sublease, so that the sublandlord would not enjoy such exclusions, on the basis that they are inapplicable to a sublandlord/subtenant relationship
Subsequent to a foreclosure, a subtenant’s interest in its sublease will rise or fall with the status of the master lease. Therefore, a subtenant should make sure that such a non-disturbance agreement has been granted to the sublandlord.
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