Don't Let Tenant Profit from Sublet

Don’t let a retail tenant that negotiates a low rent for a space turn around and sublet the space for more than the rent it owes. If you want to prevent any tenant from subletting its space without your consent, you need to say in the lease that the tenant cannot sublet the space, “or any part thereof,” without the owner’s prior written consent.

If the lease says only that the tenant cannot sublet its space without the owner’s prior written consent, a clever tenant may try to get around this requirement by subletting only a part of the space, rather than the full space. Unfortunately, the owner may not be able to stop that partial sublet.

By adding “or any part thereof,” the owner makes it clear that the tenant must get the owner’s consent to any and all sublets of any part of the space.

Note that there are other ways a clever tenant can get around subletting a space without your consent—by indirectly subletting the space to a third party through an affiliate. Here’s how the scheme works: A tenant creates an affiliate company. Since most leases typically let a tenant sublet to an affiliate without getting the owner’s consent, it then sublets the space to its affiliate. The subtenant (here, the affiliate) then transfers its ownership interest (such as stock, interests in a partnership, or membership interests in a limited liability company) to a third party. After the transfer of ownership, the third party moves into the space as a new subtenant. At no point in time is the owner’s consent required for this to happen.

Leases typically classify the transfer of a majority of the tenant’s ownership interests as an assignment, which requires an owner’s prior written consent. Unfortunately, many leases don’t say that the transfer of the subtenant’s ownership interests is an assignment as well. That is what allows tenants to avoid getting an owner’s consent.