It is not unusual for a landlord
and his tenant to mutually agree to terminate their lease.
The reasons are many. The tenant may no longer be able to
afford the lease payments, or he may need to move his business
location elsewhere. Sometimes the tenant agrees to pay a termination
fee or settlement to the landlord in order to avoid litigation,
and sometimes they just agree to terminate the lease without
a payment of any kind.
What happens if the tenant has subleased a portion of the property to a third party? An example might be an office tenant who has subleased a few office suites, or a retailer who has subleased a little extra space to a small merchant or service provider. Another example might be the subleases under an "office suite" leasing arrangement where individual offices are leased out to those needing an office and support services.
You might think that a mutual agreement to terminate the master lease automatically terminates the sublease, since the subtenant is claiming through the terminated master lease. You might also think that the subtenant would be left only with a claim for damages against the tenant (his sublessor). If you had such a thought (even though it is quite logical), you would be dead wrong!
The courts analyze the situation a little differently. They say that when a tenant subleases a portion of his space, he grants a portion of his leasehold estate to a third party. Therefore, he cannot agree to terminate an estate he no longer has. The result is that while a mutual agreement by the landlord and tenant terminates the master lease, it does not terminate the sublease. The subtenant may remain on the premises for the duration of his sublease. This can be difficult for the landlord if the subleases space is in the middle of a large suite or in some other inconvenient location, or if he is left with a checkerboard collection of office suite leases.
This is not the worst of it. Some courts have held that the subtenant no longer has to pay rent! This based on an ancient theory of real property law that the unqualified surrender of the remaining term of the master lease, coupled with acceptance by the landlord, merges the leasehold estate into the fee, subject to the estate held by the subtenant. The result is that the subtenant retains his subleasehold estate, and any claim for rent by the landlord or the sublessor is extinguished along with the termination of the master lease. Other courts have adopted the more reasonable rule that the duty to pay rent is impliedly assigned to the landlord under this circumstance, or have developed a rule requiring the subtenant to pay rent on grounds of fairness and equity. Since most courts have yet to address this issue, in many jurisdictions the result could go either way.
(Keep in mind that the above discussion refers only to terminations by mutual agreement; unilateral terminations by the landlord resulting from the tenant's breach do operate to terminate all subleases.)
What does this mean if you are a landlord? Fortunately, there are a few lessons we may derive from this scenario: