A Sublandlord’s Duty to Keep the Head Lease in Good Standing

The Dispute

A pharmacist opened a pharmacy inside a medical building, sharing a unit with a walk-in clinic run by two physicians. The arrangement worked because patients leaving the clinic filled their prescriptions next door. Four years into a five-year term the physicians moved the clinic out to a building of their own, and the building’s owner locked the premises and cancelled the lease. The pharmacy stayed open, but it was now renting twice the floor space and had no clinic sending it customers.

The Parties’ Positions

The pharmacy company advanced claims in contract and tort, contending that the sublease carried an implied term requiring the clinic operator to keep the head lease in good standing so that the sublease could be performed. It framed its loss over the initial term and the two five-year renewal terms the sublease made available, relying on authority in this court that where a sublessee properly exercises its option to renew, an implied term requires the sublessor to renew the head lease. It quantified those damages as the difference between the rent it now paid the head landlord for the enlarged space and the rent the sublease would have carried, and the payments it made to induce a replacement clinic operator into the vacated space.

The clinic operator contended that it had done nothing to justify the head landlord’s re-entry, having continued to pay rent to the end of the term while its other subtenants remained in occupation of the balance of the premises. It relied further on a clause in the sublease headed “Landlord’s Protection Against Claims”, which it submitted was a complete answer to the action. It maintained in addition that nothing obliged it to exercise its renewal options under the head lease, particularly where the subtenant had never served notice to renew the sublease. The question for the court was whether a sublease in a commercial leasing structure obliges the sublandlord to preserve, and to renew, the tenancy standing above it.

The Court’s Decision

The court held that vacating the clinic space and ceasing to use it as a walk-in clinic for at least five consecutive days breached the covenant to occupy throughout the term, justifying the re-entry. It read the protective clause as a spliced and incomplete reproduction of two head lease provisions, ending mid-sentence, and refused an effect that would leave the subtenant without recourse under the sublease. Damages ran to the two renewal terms, extending the award across more than a decade of rent differential, since the sublease had been terminated months before the subtenant’s notice to renew fell due.

The court accepted that the payments to the replacement operator were a subsidy to mitigate rather than a loan, but found that covering nearly all of its rent exceeded what mitigation reasonably required, and awarded half the sum claimed. It dismissed the oppression petition a minority shareholder had brought against the pharmacy company.

Key Lessons for Subtenants and Sublandlords

• Secure the renewal chain expressly in the sublease. A subtenant’s option to renew is only as good as the head lease standing above it, and where the sublease is silent a subtenant may have to litigate for an implied term instead of relying on a drafted one.
• Treat a covenant to occupy continuously as a live obligation, not boilerplate. A tenant that pays rent to the end of the term while leaving the premises dark can still give its landlord cause to re-enter, and re-entry takes every sublease down with the head lease.
• Do not assume that a photocopied sublease carries the protection its heading promises. A clause reproduced from a head lease by substitution and masking can end mid-sentence and lose the subparagraphs that gave it content, and exclusion clauses of that kind are construed narrowly.
• Confine mitigation spending to what the loss reasonably requires. Expenditure made to reduce a loss is recoverable only so far as it was reasonably necessary, so a party to commercial litigation that pays more than the circumstances required bears the excess itself.

The outcome of this matter turned on the wording of the head lease and the sublease and on the evidence before the court at trial. A similar dispute may resolve differently.

ATAC LAW acts for landlords, tenants, sublandlords and subtenants in commercial leasing disputes and in the litigation that follows them.

This matter was conducted by Dan H. Griffith, a partner at ATAC LAW, who acted for the subtenant at trial.