Negotiate Six Specifications in 'Assignment of Sublet Rents' Clause

In theory, a sublet seems easy: When you let a tenant sublet its space, the subtenant pays the tenant its rent due under the sublease, and the tenant pays you its rent or percentage rent due under the lease. While that’s the way sublet scenarios are designed and expected to work, you can’t count on the tenant carrying out its part of the bargain. After you’ve consented to a sublet, the tenant could decide not, or be unable, to pay you—even if it’s receiving rent from its subtenant. The good news is that you do have options to recoup the rent you’re owed, without relying on the tenant to carry out its obligations.

Think Outside Standard Documents

Don’t get caught in the mind-set that you have to use a standard lease or sublet consent form that forces you to sue the tenant for the rent due, which might waste time and money on a lawsuit to collect rent that’s rightfully yours and has no guarantee the deadbeat tenant will ever come up with the rent due—even if you win the lawsuit. The tenant could file for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code, delaying your ability to terminate the lease and evict the tenant; allow the tenant to continue collecting sublet rents until the bankruptcy trustee rejects the lease; and force you to share with the tenant’s other general creditors any residual sublet rents remaining upon final disposition of the tenant’s bankruptcy estate.

Scrap this idea altogether in favor of one that’s simpler and more effective: Add a clause to a lease or sublet consent form that you, the tenant, and the subtenant sign. The clause, like our Model Lease Clause: Get Right to Collect Rent Directly from Subtenant, should create an assignment of sublet rents by the tenant to you. And the clause requires the subtenant to pay rent to you directly if the tenant doesn’t pay. Although this assignment of sublet revenues is made when the tenant signs the lease, it doesn’t take effect until the tenant defaults under its lease. This clause is similar to a “Collateral Assignment of Rents and Leases,” which is a document often included in real estate loan documents.

Practical Pointer: Be aware that if the sublet rent you get under the assignment of sublet rents clause is less than the lease rent that you are owed, you may need to sue the tenant for the difference. But at least this clause will enable you to get some of the rent due. This type of clause is fairly common, so try not to be intimidated by pushback from a tenant. It’s not unreasonable to ask for this option.

Include These Points

Work with your attorney so that your assignment of sublet rents clause does the following:

Specification #1: Creates a license. Start by making the tenant assign to you all of its right to the sublet rents. However, in return, you must grant the tenant a license to collect the sublet rents. The license will remain in effect as long as the tenant doesn’t default under the lease [Clause, par. a].

Specification #2: Lets you revoke license upon tenant’s default. If the tenant defaults, get the right to revoke the license and demand that the subtenant pay you its sublet rent directly [Clause, par. b].

Specification #3: Gets tenant’s acknowledgments. Include certain subtenant protections in the assignment of sublet rents clause. For example, require the tenant to authorize the subtenant to pay you directly when the tenant defaults.

Also, have the tenant agree that the subtenant is obligated and entitled to pay the sublet rent to you, even if the tenant gives the subtenant contrary instructions, and the subtenant won’t be liable to the tenant for paying you sublet rents paid under the assignment of sublet rents clause [Clause, par. b]. This is crucial because, without those protections, the subtenant may refuse to pay you the sublet rents for fear the tenant may take action against it.

Specification #4: Indicates how to apply sublet rents. To make the assignment of sublet rents clause more palatable to a tenant, agree that you won’t use sublet rents except for the purpose of:

• Applying them against the tenant’s unfulfilled lease obligations—in other words, to cure the tenant’s default;
• Getting reimbursed for costs you incurred as a result of the tenant’s default; or
• Being compensated for other damages that you suffered because of the tenant’s default [Clause, par. c].

Specification #5: Requires you to deliver unused sublet rents to tenant. Suppose there are sublet rents remaining after you have applied them to curing the tenant’s default, reimbursing your costs, and getting compensated for your other damages. What should you do with them? Promise to deliver the remainder to the tenant [Clause, par. d]. Offering this without being asked can create goodwill.

Specification #6: Includes protections for you. To protect your interests, clarify that your acceptance of the sublet rent directly from the subtenant does not mean you are:

• Consenting to the sublet;
• Assuming—that is, taking on—any of the tenant’s duties to the subtenant;
• Creating a legal relationship—known as “privity”—between you and the subtenant; or
• Agreeing to sign a nondisturbance or recognition agreement by which you say you would recognize the subtenant and honor its sublease if you terminate the tenant’s lease [Clause, par. e].

Without this language, if a subtenant ever takes you to court, a judge might find that you consented to its sublease and are obligated to sign an agreement recognizing the subtenant, if you had not done so already. Also, you could become responsible for providing the subtenant with services that you usually provide to the tenant—such as heat, electricity, and parking.

Negotiate Smart Tenant’s Demands

Be prepared for a tenant with leverage to make these demands about adding the following points to the clause, and have your negotiation strategy ready:

Demand #1: You will give the tenant notice of and an opportunity to cure a lease violation before it becomes a default requiring the subtenant to pay you the sublet rents directly; and

Demand #2: You will stop accepting rent from the subtenant if the tenant cures the violation before it becomes a default. If the tenant makes this demand—and you agree to it—indicate in the lease or sublet consent form that the tenant must remain in good standing for a set amount of time—for example, six months after curing the violation—before you will stop accepting rent from the subtenant.

Practical Pointer: A subtenant may ask for language in the sublet consent form that says the tenant must credit any rent the subtenant pays directly to you against the rent due to the tenant under the sublease. There is no reason for you to object to this request, but let the tenant decide whether to add such language to the sublet consent form, as it affects only the tenant-subtenant relationship.