Copyright 2008, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Real Estate Leasing, April, 2008
Subleases are far from being a new concept in leasing, but recent cases have highlighted the subtle differences of a sublease from a standard commercial lease. Sublandlords and subtenants should keep these thoughts in mind as they navigate the potential traps of sublease negotiations.
Perhaps the most commonly understood difference between an assignment and a sublease is that a sublease is a conveyance of less than everything the sublandlord has under the head lease. Typically this takes the form of reserving the last day of the term to the sublandlord.
However, it is unfortunately still the case that sublandlords and subtenants will often forget to reserve that last day, which may significantly complicate matters at a later time.
In Goldman v. 682980 Ontario Ltd., for example, the Ontario Court of Appeal considered whether or not the failure to reserve the last day turned a sublease of a portion of leased premises into an assignment. An option to purchase a shopping centre was at stake; the head landlord argued that the failure to reserve the last day of the term meant the "sublandlord" had assigned away its right to exercise that option. Although the facts of the case ultimately could not support a finding that there was an intent for the option to flow through to the "subtenant," the Court re-emphasized that the sublease became an assignment by operation of law due to the failure to reserve the last day of the term.
Even though all ended well for the "sublandlord," the expense of litigation could have been avoided. This case emphasizes the danger in not reserving the last day of the term and further demonstrates that all parties have a vested interest in double-checking recitals and the length of the term.
In the recent case of 581834 Alberta Ltd. v. Alberta Gaming and Liquor Commission, the Alberta Court of Appeal considered a sublease that provided that the subtenant would have quiet enjoyment of the subleased premises without hindrance or molestation by the sublandlord or any person claiming "by, through or under the sublandlord." The head lease required the head landlord to use reasonable efforts to have its mortgagees execute a non-disturbance agreement, if requested. However, a non-disturbance agreement was never requested, and the head landlord subsequently defaulted on its mortgage and its mortgagee arranged for foreclosure.
The effect of foreclosure was that the head lease and sublease were extinguished. The subtenant consequently brought an action against the sublandlord for breach of the covenant for quiet enjoyment, claiming that the head landlords mortgagee claimed "through" the sublandlord. The Court of Appeal rejected this argument and held that the covenant was qualified and did not protect the subtenant from eviction by paramount title i.e., the head landlord and its mortgagees.
Prudent subtenants will want to carefully examine their covenant for quiet enjoyment and ensure that it is unqualified. Further, and it should go without saying, non-disturbance agreements should be requested if such a right is provided.
Most subleases provide that the terms of the head lease will be performed by the subtenant, with respect to the subleased premises, as if it were the head tenant under the head lease. However, in many cases, an absolute flow-through is not appropriate. Parties should consider the implications of the flow-through in many areas of the sublease, including rent, maintenance and repair, restoration obligations, time to cure defaults, and use.
The latter issue was considered in the British Columbia Court of Appeal decision in Canacemal Investments Inc. v. Regions Group of Companies Trading Ltd. The head lease provided that the premises would be used for "general office purposes."
The sublandlord then subleased a portion of the premises to a language instruction company and provided that the offices could be used for language instruction. The sublandlord and the subtenant did not obtain the consent of the head landlord to this use and, ultimately, the Court found that "language instruction" did not fit within the meaning of "general office purposes." The terms of the head lease prevailed, and the sublandlord was found to be in default.
Two principles are highlighted here. First, a strict flow-through is not appropriate in many instances (as was the case here) and deviations should be addressed in the sublease. Second, and the corollary to this, is that the sublandlord cannot grant to the subtenant more than what it has. Both parties would be wise to ensure the head landlords consent is obtained to deviations when there is any doubt as to this matter.
Although both sublandlords and subtenants often take the point of view that subleases are "easy" negotiations given that the terms have already ultimately been decided by way of the head lease, subleases also leave the parties in a more tenuous position than a traditional lease. Parties should consider this and act to protect their interests accordingly, whether this is by way of improving the covenant for quiet enjoyment, drafting the sublease to adequately address required deviations, obtaining head landlord consents or ensuring that non-disturbance agreements are obtained.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.