A tenant remains liable under its head lease and subleases the same premises to a subtenant. What position does the original tenant occupy?
Correct Answer
D) A sandwich lease position as head tenant and sublessor.
The original tenant becomes a sublessor while remaining obligated under the head lease, between owner and subtenant. Its economics depend on net sublease receipts, head-lease obligations, costs, timing and enforceability, not merely an undiscounted gross rent spread.
Why This Is the Correct Answer
Option D is correct because the original tenant holds a sandwich lease position, acting as head tenant toward the owner and as sublessor toward the subtenant. It remains obligated under the head lease while receiving sublease rent. The value of that position depends on net sublease receipts, head-lease obligations, costs, timing and enforceability.
Why the Other Options Are Wrong
Option A: Owner of the leased fee, because it subleases.
Option A is wrong because subleasing does not make the tenant the owner of the leased fee. The leased fee remains with the property owner who granted the head lease; the tenant holds a leasehold and grants a subleasehold from it.
Option B: A landlord owning two unrelated properties under one lease.
Option B is wrong because the tenant does not become a landlord owning two unrelated properties under one lease. It holds one leasehold in the same premises and has created a sublease out of that interest.
Option C: A fee-simple interest free of lease obligations.
Option C is wrong because the tenant does not hold a fee-simple interest free of lease obligations. It remains liable under the head lease, which is the opposite of an unencumbered fee simple.
The tenant is the filling
Owner on top, subtenant on the bottom, and the original tenant is the filling in the sandwich.
How to use: Use this to identify the middle party whenever a sublease appears.
Exam Tip
When a tenant subleases but stays liable on its own lease, think sandwich leasehold rather than any ownership interest.
Common Mistakes to Avoid
- -Thinking a sublessor acquires the leased fee
- -Assuming the original tenant is released from the head lease by subleasing
- -Valuing the position as an undiscounted gross rent difference
Concept Deep Dive
Analysis
This question tests recognition of a sandwich lease. When a tenant subleases its premises but remains liable under the head lease, it sits between the owner and the subtenant. It is both a tenant under the head lease and a landlord (sublessor) to the subtenant.
Background Knowledge
Property rights can be layered: the owner holds the leased fee, the tenant holds a leasehold, and a subtenant holds a subleasehold. The intermediate party in this chain holds a sandwich leasehold. Its economic value reflects the spread between what it receives and what it owes, adjusted for costs, risk and timing.
Real-World Application
A retailer that downsized subleases its store to another merchant at a higher rent but remains liable to the building owner. An appraiser valuing the retailer's position estimates the net sublease receipts over the remaining term, subtracts its head-lease obligations and costs, and considers the subtenant's credit risk. The result reflects a sandwich leasehold rather than a simple gross rent spread.
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