LEASE AGREEMENT REFERENCE GUIDE 820: STRATEGIES FOR MARKETING MASTER LEASES $49.95
STRATEGIES FOR MARKETING MASTER LEASES
This LARG looks at the marketing master lease--a deal where the tenant leases an entire complex or building with the intention of subleasing it at a profit. The first section looks at the characteristics of master marketing leases in general, and focuses upon recognition and subleasing issues in particular. The Lease Clause Critique contains a sampler of several clauses from a marketing master lease with extensive comment.
Anatomy of the Marketing Master Lease
In a marketing master lease, the tenant leases an entire property (which is often empty or nearly empty) with the express intention of making sublease deals for the space. The transaction is an entrepreneurial deal for the tenant, since it hopes to sublease the space at a profit. The tenant is usually a broker or developer who knows the market well, with a proven track record in leasing the type of space involved.
For the landlord, the marketing master lease can provide quick relief from a problem it wishes would just go away--having excess space to lease in a weak market. In many cases, the landlord is a corporate user with surplus space on its hands and a disinclination to assume the marketing and administrative burden inherent in leasing the space to numerous small users.
Not a Financing Tool
The marketing master lease is similar in some respects to a master lease which serves as security for the financing of a development deal. For example, in both cases an entire parcel or complex is subject to one lease with one tenant, and substantial subleasing is anticipated by the parties. However, master leases negotiated with pension funds and financial institutions are designed to provide predictable financial returns on investments for such parties, and high percentages of preleasing is nearly always part of such packages. By contrast, the marketing master lease is designed to lease space in troubled developments or weak markets, or both. And it is the marketing expertise of the tenant that motivates the landlord rather than the tenant's financial strength.
Marketing Master Lease Ingredients
Frequently, one or more of the following factors are present in a marketing master lease deal:
Of course, the subleases under a master lease terminate if the master lease is terminated, no matter what the reason for such termination. This means that it is critical for the subtenant to obtain a recognition (or non-disturbance) agreement executed by the master landlord. Such an agreement typically provides that, if the master lease terminates, the subtenant will attorn to (i.e., render performance to) the master landlord, and that the master landlord will recognize the sublease (i.e., not disturb its possession of the premises) so long as the subtenant is not in default under the sublease.
If the subtenant fails to obtain such a recognition agreement, it will lose its leasehold improvements in the premises if the master lease is terminated since the sublease will also terminate. This means that the tenant will not be able to finance such improvements with third party lenders, because if the sublease is terminated, the security for such financing evaporates. As a result, well represented tenants will not sublease space without the benefit of a recognition agreement, unless the sublease has a very short term, or unless no improvements are contemplated for the space.