Get Right to Take Direct Legal Action Against Defaulting Subtenants

Allowing tenants to sublease the property they lease from you to third-party subtenants over whom you have no direct control carries a degree of risk. Since you don’t have a direct contract with the subtenant, you may be dependent on the tenant to enforce the terms of the sublease and have no direct way of compelling the subtenant to comply. An effective solution to this problem is to have the tenant assign its sublease enforcement rights directly to you. Here’s a strategic game plan, along with a Model Lease Clause you can use to deploy it.

Problem: Landlords Depend on Tenants to Enforce Subleases

A sublease is a contract between a tenant and a subtenant. While landlords may consent to these arrangements, they’re not direct signatories to them. And under the common law rule known as “privity of contract,” a person may neither enforce nor be liable under a contractual provision unless it’s actually a party to the contract. Result: Your only recourse against a subtenant that breaches a sublease is to rely on the tenant to get the subtenant to cure the default.

Example: A tenant subleases a lease requiring it to make necessary repairs to the premises. The repairs obligation from the original lease is part of the sublease. The subtenant fails to make the needed repairs. Without direct recourse against the subtenant, the landlord has to press the tenant to take legal action against the subtenant. But the tenant may have little interest in doing the landlord’s bidding, especially if it no longer occupies the space.

Solution: Get Tenants to Assign Their Enforcement Rights to You

This is why attorneys say it’s advisable to ask tenants that sublease to assign their enforcement rights against the subtenant to you. Getting direct recourse against a subtenant, including the potential to collect money damages, is especially important when dealing with tenants that have limited financial resources. The assignment is also crucial when tenants are planning to vacate all or most of the property they sublease and thus will likely have less incentive to press a subtenant to cure a sublease violation.

By contrast, the assignment is less of an imperative when subleasing tenants have deep pockets. Even if they vacate the subleased premises, such tenants will generally have greater motivation to get subtenants to cure sublease violations to avoid being sued by their landlords for money damages.

Similarly, tenants that remain in part of the subleased premises or plan to return to the premises after the sublease ends will have a significant interest in ensuring that they don’t lose the prime lease as a result of violations committed by the subtenant.

2 Strategies for Executing the Assignment

In terms of process, there are two basic ways to get a tenant to assign you its sublease enforcement rights:

Strategy 1. Make assignment a lease provision. The first option is to have the lease require the tenant to assign its enforcement rights any time it gets your consent to a sublease arrangement. As with our Model Lease Clause, the lease provision should include actual language for the tenant to insert into its sublease agreement.

Strategy 2. Get assignment after sublease is signed. If a tenant whose current lease doesn’t include assignment language enters into a sublease agreement, ask it to assign its enforcement rights at the time of the sublease. You might want to consider talking to your attorney about making the assignment a condition to granting the required consent to the proposed sublease.

4 Things to Include in Assignment

Our Model Lease Clause is a template of what an assignment of a tenant’s sublease enforcement rights to a landlord should include. Of course, you’ll need to adapt it to your own situation. There are four things you’ll want to do in crafting your own clause:

1. Limit coverage to sublease defaults that also violate prime lease. Subleases may include obligations that affect only the tenant and subtenant. In negotiating a sublease enforcement rights assignment with a tenant, you should focus only on the provisions of the sublease that affect you. Rent payable by the subtenant to the tenant may be something you don’t need to cover in the assignment where the parties have negotiated their own business arrangement and you collect the rent and other lease payments directly from the tenant.

Examples of sublease terms that you do want to cover include those that pertain to the subtenant’s use, repair, and maintenance of the premises and the obligation to carry insurance. Strategy: Rather than spelling out each clause individually, limit the assignment of enforcement rights to sublease violations that also constitute violations of the prime lease [Clause, par. a].

2. Clarify what your right to enforce includes. The clause should spell out the enforcement actions the tenant is assigning to you, including the right to sue in the tenant’s name to collect damages from and/or evict the subtenant. The assignment should also authorize you to take “ancillary actions” to enforce the sublease including the right to send the subtenant default and other notices on the tenant’s behalf [Clause, par. b].

3. Require tenant to cooperate in enforcement action. You may need the tenant’s help to proceed against a defaulting subtenant, such as by executing any notices required under the sublease. So, the assignment should specifically require the tenant to cooperate with you and execute whatever documents you consider to be “reasonably necessary” to effectively implement your assigned enforcement rights against the subtenant [Clause, par. c].  

4. Reserve your enforcement rights against subtenant. Get the tenant to acknowledge that exercising your assigned enforcement rights or remedies against the subtenant in no way precludes or impairs you from exercising any rights or remedies that you might have against the tenant. This preserves your right, among other things, to sue the tenant or terminate the lease if it fails to cure a subtenant’s sublease violation [Clause, par. d]. 

Negotiating Strategy & Potential Compromises

Tenants may balk at signing away their sublease enforcement rights, especially when they have a preexisting positive relationship with the subtenant. If tenants do push back and they have the negotiating clout to command concessions, here are two potential compromises to consider:

Compromise 1. Subtenant gets cure period before assigned enforcement begins. If tenants want an opportunity to deal with the subtenant first, agree to notify the tenant of the default and refrain from exercising your assigned enforcement rights against the subtenant for a specific number of days. Then, if the default isn’t cured by that deadline, your enforcement rights kick in.

Compromise 2. Enforcement rights cover only “material” defaults. Another possibility is to limit the assignment to enforcement actions for lease defaults that you deem to be “material.” If the tenant objects to letting you determine what constitutes a material default, offer to use “reasonable judgment” in exercising your discretion. And if that doesn’t work, consider inserting language into the assignment provision providing for expedited arbitration in the event of disputes over whether a particular sublease default is material.