Obtaining Consent to Sublease in Toronto Office Space
A sublease on office space might be an excellent, cost-effective solution for office accommodation that satisfies the key criteria in an office search. Most likely the rent on office space under a sublease is far below the rent commanded by a head lease, the office premises being subleased is often complete with leasehold improvements in place and sometimes might even include furniture, phone systems and other fixtures being left behind by the sub-landlord. The length of a sublease term is naturally shorter than a lease term, which could also be a benefit to a tenant that is looking for a shorter length of occupancy.
Though, not to discourage the an office tenant from subleasing, the subtenant should be aware of the fact that in most of the best quality office buildings in the Greater Toronto Area, the head landlord will allow such a transfer of the rights to use the office space only on condition that their form of Consent to Sublease agreement has been executed by all three parties to that agreement: the Sub-Tenant, the Sub-Landlord (who is the Tenant under the Head Lease on the office premises) and the Head Landlord.
Typically, the Consent to Sublease sets out that i) the Tenant on the Head Lease remains responsible for its obligations under the Head Lease, ii) the Sub-Tenant agrees to abide by the terms of the Head Lease, and (possibly most onerous for the Sub-Tenant) iii) the Sub-Tenant is responsible for the obligations of the Tenant in event of default of the Tenant under the Head Lease.
The third part of the Consent to Sublease agreement noted above, should be well understood by the Sub-Tenant: notwithstanding the terms of the Offer to Sublease and the resulting Sublease between the Sub-Tenant and the Sub-Landlord, the subtenant might be exposed to much greater cost than they had bargained for. For example, the Tenant in the Head Lease, as previously noted, is likely paying more rent per square foot per year than the rent set out in the sub-lease in addition to the fact that there may be other provisions such as a “make-good” clause in the Head Lease that the Sub-Tenant does not anticipate being responsible for.
Subleasing is inherently more complex than leasing because it involves three parties and refers to a pre-existing agreement: the head lease. Consequently, the length of time to reach agreement between the Sub-Tenant, the Sub-Landlord and the Head Landlord could be much longer than anticipated even though the terms of the Sublease have been quickly resolved. The head lease might provide as long as forty-five (45) days for the Head Landlord to provide its consent and the Head Landlord will usually want to perform diligence on the sub-tenancy in addition to investigations of the sub-tenancy by the sub-landlord. This may result in eating into valuable free rent period negotiated prior to the commencement of the sublease, which worsens the deal for the Sub-Tenant. Even worse, the Sub-Tenant may not be allowed to occupy in time based on their schedule for move in.
In Toronto the experience has been that Head Landlords are generally co-operative to provide their consent to a sub-lease but remember that they have much less to gain from the occurrence of a sub-lease in their office building than do the other two parties. In fact, the sublease opportunity may well compete directly with available office space that is being offered to the market on a direct basis. The Head Lease could prohibit a transfer to an existing tenant in the building or other building in the Head Landlord’s portfolio and the Head Landlord would not want to put themselves into breach of contracts with other tenants, such as rights to exclusive uses in the office building.
Consider a situation where a mutually acceptable agreement to sublease is entered into between a Sub-Tenant and a Sub-Landlord subject to a Head Landlord consent and the Head Landlord has agreed to consent provided their form of Consent to Sublease is fully executed. What precautions can a Sub-Tenant take to reduce the risk that the Head Tenant (their Sub-Landlord) will not enter into default of the Head Lease? – The Sub-Tenant should investigate the financial covenant of the Sub-Landlord to insure that the Sub-Landlord has the wherewithal to fulfill its obligations under the Head Lease. By the fact that the Sub-Landlord has maintained their responsibilities at the time of the request for a consent from the Head Landlord to sub-lease is some assurance in itself but it is still prudent for the Sub-Tenant to know the credit history and financial health of the Sub-Landlord they are relying on to keep paying their rent to the Head Landlord.
Recently a prospective sub-tenant for office space in the North Yonge office node pursued a sublease in an A Class office building near Yonge Street and Finch Avenue only to realize that the process would take too long and the risk would be too great to meet their business objectives. After lengthy negotiations for the Offer to Sublease, the Sub-Landlord was delayed in gathering all of the necessary documentation and there was not enough time to revise the consent agreement to be in a form that would satisfy the Sub-Tenant’s legal counsel. Rather than going forward with the sub-lease, it was deemed more advisable due to the short term of occupancy for the firm to continue using the services of a business centre where the contract was greatly simplified though at a higher cost per square foot.