The mechanics of subleasing and how this rather complicated process can be implemented to help users stuck in space they don’t need or can’t use.
Too often, tenants and their landlords over-focus on lease rate and lease term, but there are dozens of other components to every industrial lease and current market conditions are moving several of them up our priority list as we negotiate leases for our clients.
We’ve covered several of them already here on the blog:
- Why So Many Industrial Building Alterations Are Done Without Permits
- Utility Installations vs. Trade Fixtures: Double Trouble for Tenants
- Industrial Building Maintenance – What Tenants Need to Know
- 3 Ways to Mitigate Maintenance Costs
Previous Posts in This Series:
Now, we address the often misunderstood issue of Subleasing.
First, we’ll look at the mechanics of subleasing before we get into how this rather complicated process can be implemented to help users stuck in space they don’t need or can’t use.
Almost every industrial lease has a provision that allows a tenant to sublease space, but the process is strictly defined to protect the landlord from losing control over who occupies his building and what they use it for.
In general, a landlord’s consent to sublease cannot be unreasonably withheld, and the approval process usually centers on the creditworthiness of the subtenant and the intensity of the use. A landlord may have negotiated easier terms for a well-heeled tenant with a big balance sheet.
Likewise, a last-mile distribution tenant is a lot easier as far as wear and tear goes than a boat builder or metal fabricator who wishes to sublease the same space. The approval process gives the landlord a chance to demand additional financial security and screen for uses that may be detrimental to the property’s condition or those that can become a nuisance to other tenants who lease nearby space from the same landlord.
To be sure, subleasing is more complex. There are three parties to the transaction and two sets of negotiations going on at the same time.
Often, the tenant attempting to sublease is struggling financially and may already be in arrears on rent. That makes for unhappy landlords and tends to make them less cooperative as they otherwise might be. For these reasons alone, we tend to steer clear of sublease space for the tenants we represent. However, not all tenants looking to sublease are in trouble.
Some have outgrown their space or modified their business model that makes their current space obsolete. Others have decided to buy their own building because they are tired of paying rent. So, space offered for sublease is not automatically a problem, but any tenant looking at space offered for sublease should gain a full understanding of the situation, including the landlord’s likely level of cooperation.
Another major hurdle in sublease scenarios is the time remaining on the existing lease. Tenants cannot exercise renewal options unless they are in possession of the space without the intent to vacate. So, only the remainder of the current fixed term is available for a sublease. More often than not, the subtenant is looking for a longer term than is available. This could mean another costly move that could wipe out any savings the subtenant might have realized by paying an under-market sublease rate.
However, in today’s low vacancy environment, what starts as a sublease often ends up as a lease termination agreement between the landlord and original tenant, and a new direct lease with the would-be subtenant. In fact, that is the goal going into many sublease negotiations.
In our next post we will discuss more on this scenario, which is, in most instances, is better for all concerned. Stay tuned…