Include Payments to Affiliates in Sublet Profit-Sharing Clause

Typically, when an owner agrees to allow a tenant to assign or sublet its space, it uses lease provisions that require the tenant to give it some or all of its profits from any sublet or assignment. If your lease says that these profits include the sale of any of the tenant’s personal property, namely furniture and equipment, you might think that you’ve covered all your bases and that the tenant must pay you under those circumstances.

But if you haven’t carefully drafted this portion of the lease, the tenant could try—and succeed at—getting around this obligation if nothing in the lease stops the tenant from having the subtenant pay the tenant’s affiliate for the personal property or having the subtenant’s affiliate buy the property from the tenant for the subtenant.

Furniture and equipment can be very expensive, and the tenant won’t want to share the profits of its sale with you. How can you require it to? Use lease language that makes sure that sublet profit-sharing covers payments by and to affiliates.

How Tenant May Evade Paying You

Here’s a closer look at how the tenant can get around provisions that are too loosely drafted. Say your lease requires the tenant to give you half its sublet profits. Profits include all the money that the tenant gets from the subtenant, less rent that the tenant pays you, plus certain other costs that the tenant incurs. But profits don’t include payments made by the subtenant to the tenant’s affiliate or payments made by the subtenant’s affiliate to the tenant.

So, if the tenant wants to sell its office equipment to the subtenant, but it doesn’t want to share the profits with you, either the tenant or the subtenant can set up an affiliate. The tenant sells the equipment to its affiliate (for little or nothing), and the affiliate then sells the equipment (at market rates) to the subtenant’s affiliate, which pays the tenant and then sells the equipment (for little or nothing) to the subtenant.

Drafting ‘Payments to Affiliates’ Language

In either of these situations, you could have a tough time claiming that the payment should be included in the tenant’s profit. The tenant could argue, and a court could agree, that because the lease doesn’t discuss this type of payment, you aren’t entitled to share in any of those sale proceeds under the profit-sharing arrangement.

You can avoid this result—which can significantly decrease the amount of money you should be entitled to—by saying in your lease that “sublet profit” includes all the money paid by the subtenant or any entity or person related to, or affiliated with, the subtenant to the tenant or any entity or person related to, or affiliated with, the tenant. This includes the tenant’s affiliates and sister corporations—and the subtenant’s too. To do this, add the following language to your lease where it discusses “sublet rent” under your profit-sharing arrangement:

Model Lease Language

…any Rent or other consideration paid to Tenant, directly or indirectly, by any Subtenant or any other entity or person related to, or affiliated with, Subtenant, or any other amount received by Tenant or any entity or person related to or affiliated with, Tenant (including, but not limited to, any subsidiary or sister corporation) from, or in connection with, any subletting (including, but not limited to, sums paid for the sale or rental or consideration received on account of any contribution of personal property, fixtures, improvements, furniture, equipment, or sums paid in connection with the supply of electricity or HVAC).