Subleasing has become a matter of survival for many retailers and other commercial tenants. To fully evaluate any sublease deal, a systematic, almost surgical approach is needed.

Some negative forces have combined recently to make subleasing increasingly important. Overbuilding in the '80s, the recession of the '90s, consolidations, competition for market share and Wall Street's expectations of growth controls have left hundreds of retailers and other tenants holding excess or unproductive space. For these tenants, finding a sublessee is not just good business -- it's survival.

When retailers are caught holding excessive space, or when sales drop below R100 a foot, the time bomb begins ticking in the search for a global solution often involving dozens or hundreds of locations. Indeed, these forces have been brought to bear on a literal "who's who" of retailers. In the context of retail space, the problems are compounded by the retailer's limited expertise as a landlord. The company's understanding of its own needs may not school it in the needs of a sublessee in a different retail business.

Nor is subleasing as a survival tool just a retail phenomenon -- it has a stranglehold on the office market also. In downtown Los Angeles alone, there is approximately 1.8 million square feet of built-out sublease space available in Class A buildings. In the San Francisco Bay Area, the figure is no less daunting.

To successfully dispose of excess space -- retail, office or even industrial -- basic survival techniques require an intimate understanding of subleasing. Just as important is the old adage that an ounce of prevention is worth a pound of cure. This can only be accomplished through anticipating the need to dispose of space in the leasing process.

The very nature of a sublease complicates its use as a survival tool. By definition, it is used only when not all rights and benefits of a lease are being transferred, as they would be if the lease were assigned to the new tenant.

The decision to sublease rather than assign may have to do with the new subtenant's limited needs, but it may also reflect the sublandlord's desire to minimize its continuing liability under a lease that it will no longer control. For example, where an assignee files bankruptcy, the master tenant is not able to resume control of the premises, but such control is possible if the new tenant is a sublessee. Similarly, a sublease may be used to ensure an expedited remedy to regain control of the lease before it can be terminated, a remedy that would not be available under an assignment.

Finally, a sublease may be used to prevent the transfer of the leased premises to a party whom the original sublandlord might consider an unacceptable credit risk. This is especially likely where the original sublandlord must quickly dispose of numerous leases. A sublease presupposes complex relationships, and the selective transfer of some, but not all, of the rights and benefits under a master lease may complicate an already crowded chain of title involved in a sublease. This chain of title could include (starting from the top of the chain): a lender holding a deed of trust on the title, the master landlord, the master tenant/sublandlord, a lender holding a deed of trust on the sublandlord's interest in the master lease (the leasehold lender), the subtenant, a lender holding a deed of trust on the interests of the subtenant in the sublease, and even an owner of the improvements. The relationships between and among these numerous parties create almost as many rules of engagement.

For example, like the master tenant, an assignee who assumes a lease has a contractual relationship with the master landlord, but a sublessee's relationship is with the sublandlord only. The result of this lack of a contractual relationship is that the master landlord is not required to accept a subtenant's offer to cure a default under the master lease and the subtenant is left in the precarious position of relying on its sublandlord (often a downsizing company with declining fortunes) to preserve its leasehold interest.

Also, if the master landlord chooses to terminate the master lease the subtenant is out of luck. If the senior lender forecloses under a deed of trust senior to the master lease, an amendment will not be binding on the senior lender in the event of a foreclosure.

The only way for a subtenant to avoid this result is to create privity of contract with the master landlord (and anyone up the chain, including the senior lender) through a nondisturbance agreement, which provides that the sublease will remain undisturbed as a lease between the master landlord (or foreclosing lender) and the subtenant if the master lease is terminated.

Subleasing is further complicated by well-established but frequently misused subleasing conventions, such as incorporation by reference, through which various terms and conditions of a master lease become part of the sublease. This shortens the sublease and should ensure consistency between the two leases. But the boilerplate language may incorporate obligations that a party simply cannot perform. For example, a sublandlord may not be able to perform the master landlord's obligation to maintain and repair areas it owns and controls outside the leased premises.

Further, many subleases employ assignment, assumption and delegation clauses, under which the sublandlord assigns some or all rights and benefits under the master lease and the subtenant assumes some or all of the duties and obligations. The result may be the assignment of valuable unknown rights or the assumption of unanticipated obligations, such as an option to extend the term.

Finally, subleases routinely declare that the sublease is "subject to and subordinate to the master lease" without making clear to the subtenant that it has no greater rights than those granted to the sublandlord under the master lease.

To avoid some of these unintended consequences, a sublease should set forth basic ground rules for converting the master lease's terms. For example, if only a portion of the premises is subleased, incorporating master lease terms that refer to the "premises" may mean the larger premises. Consequently, most subleases will provide that when incorporating by reference, reference to the "premises" refers to the subleased premises. there are numerous other recognized ground rules -- and some not so well recognized.

To fully evaluate any subleasing transaction, a systematic, almost surgical approach is required. The first step requires title evaluation; the second is to question each and every sublease provision. In any subleasing transaction (but particularly ones involving title insurance), the chain of title must be thoroughly understood and often mended where a break in title has occurred. A common error is a title review focused on the master leasehold and not on the title to the property. A leasehold title search will not reveal some encumbrances -- such as a deed of trust recorded after the master lease -- that could break the chain of the title or give some other party the right to withhold consent to the transaction or the use or improvement of the subleased premises.

Another common problem arises where the parties do not anticipate other essential documents that may be required by a title insurer, lender or other party to complete the transaction. For example, a title company may require an estoppel certificate, nondisturbance agreement or other document from the holders of a senior interest in order to issue a sublease hold title policy.

Addressing the chain of title is a start, but it is not the end of the title inquiry. Pricing of title insurance, binders and commitments to ensure related transactions and parties, and even escrow accounts all may play a critical role. So might a transfer of ownership in improvements that is actually a financing transaction in disguise. Because a master leasehold interest and sublease hold interest are different estates and are acquired or disposed of in different transactions, binders, commitments and pricing must be agreed to up front as part of the overall transaction.

With title fully evaluated, every sublease provision, especially those that rely on subleasing conventions, should be questioned. The following are some of the questions to be addressed:

• Premises. Has sublandlord granted the subtenant all access rights granted under the master lease? If the sublandlord has subdivided the premises, has the sublandlord reserved a right of entry for one subtenant to access utilities that may be in the other subpremises? Which party is obligated to maintain and repair these utilities, and how are the costs allocated?

• Term. Does the sublease term end on or before the master lease? If it expires before, is the remaining term so short that the subpremises will be unleaseable? Will the master landlord accept subtenant's exercise of option rights to extend the lease? Because the sublandlord remains liable for all obligations under the master lease during the option terms, does the sublease condition subtenant's extension of the master lease on subtenant's financial performance at the time?

• Rent. Has the subtenant assumed the sublandlord's rental obligations under the master lease, in addition to paying specified rent? May the subtenant pay rent directly to the master landlord, and must the master landlord accept such payment? Who is entitled to the security deposit under the master lease upon termination? For a master lease with percentage rent, how do percentage rent provisions work where the master lease premises are subdivided, or where the percentage rent is inappropriate for the particular retail use?

• Condition of premises. If the sublandlord subdivides the master premises, does one subtenant have a right to cure the other subtenant's (or sublandlord's) failure to maintain the other subpremises? Has the subtenant inadvertently assumed obligations to correct defects or to comply with laws such as those governing hazardous substances?

• aivers and releases (including waivers or rights of subrogation), has the subtenant expressly waived such claims against the master landlord? More important to the subtenant, have the master landlord and its insurance carrier waived claims and rights of subrogation against the subtenant to the extent insured under the master landlord's casualty policy? Will the subtenant's maintenance of insurance specified under the master lease satisfy the sublandlord's obligations or must the sublandlord also carry insurance? Who controls insurance proceeds if the subtenant obtains the insurance coverage?

• Expenses. If the master lease is a modified gross lease, should the subtenant have the same base year as the master lease or should expenses payable by the subtenant be calculated on a new base year?

• Alterations. Is the subtenant agreeing to remove alterations previously installed by the sublandlord at the end of the sublease term? In addition, if new improvements are critical to the subtenant's operation, has the master landlord's consented to such alterations?

• Signage. Because signage rights are frequently personal only to the master tenant has the subtenant confirmed that signage rights are adequate for its business? If the sublandlord subdivides the master premises, how are the master lease signage rights allocated between the subtenants?

• Use. Is the use clause broad enough to accommodate the subtenant's contemplated use of the premises? In the retail context where sublandlord subdivides the master leased premises, should the use of one subpremises be restricted to prevent competition from the other subpremises?

• Damage and destruction; condemnation. Where the master tenant has broad obligations to restore any damage to the premises, is the subtenant similarly obligated? Where the sublandlord subdivides the master leased premises, which subtenant should assume the master tenant's rebuilding obligations? Which subtenant, if any, has the right to exercise the mater tenant's termination rights under the master lease? By subdividing the premises, has the sublandlord agreed to termination rights not available under the master lease? If rent abates under the master lease in the event of damage or condemnation, how is the rent abatement shared? Who is entitled to insurance or condemnation proceeds?

• Defaults. Is the time for performance of obligations by the subtenant shorter than the period permitted under the master lease sot hat the sublandlord can perform if the subtenant does not without being in breach under the master lease? What steps can be taken to minimize a breach caused by either the sublandlord or a subtenant which the other party cannot cure? Has the subtenant obtained an estoppel certificate from the master landlord and any other parties up the chain?

• Assessment, assumption and delegation. Do the rights and interests assigned by the sublandlord include rights to insurance proceeds, condemnation proceeds, causes of action or other rights that may not be intended? Has the subtenant assumed obligations of the master tenant that should have been performed before the sublease? Is the subtenant assuming other obligations, such as those arising under a reciprocal easement or covenants, conditions and responsibilities?

• Rights and obligations between subtenant and parties up the chain. What rights does the subtenant have to enforce covenants against the master landlord? Has the master landlord agreed to notify the subtenant immediately of any notices of default received from the master landlord? Has the subtenant obtained nondisturbance agreements from all parties?

• Subject and subordination provisions. Has the sublandlord made any promises inconsistent with any superior agreements? Has the sublandlord reserved some rights to amend the master lease or any other superior agreement? Has the sublandlord conditioned any consent it must give on the master landlord's consent? Have the parties anticipated the consequences of a bankruptcy by either the sublandlord or the subtenant? This checklist is far from exhaustive. A careful consideration of these and other issues is critical to ensuring that all contingencies have been anticipated in the sublease. This attention to detail, however, is well worth it. It's a matter of survival.