Subleasing can be a viable solution to the shifting needs of space occupiers, but there are inherent complexities that bear close scrutiny before moving forward with a sublease transaction.
Let’s take a look at three of the most common concerns and risks of subleasing associated with this oft-used arrangement.
1. Three parties must agree, not just two
A sublease requires the full agreement of the Master Lessor (Landlord) the Sublessor (Existing Tenant) and the Sublessee (New Tenant).
After the Sublessor and Sublessee agree to terms, a fully-executed sublease document must be approved and executed by the Master Lessor, who may withhold consent to the deal for a variety of reasons, including business use or creditworthiness of the Sublessee, among others.
Generally speaking, Landlords don’t like to sublease their space because they feel the loss of direct control over the space occupier, even though the Sublessee and Sublessor are both bound by the terms of the original lease.
2. Sublessors are often operating under financial stress
These sublessors are not in a position to make necessary improvements to the space to accommodate the needs of the Sublessee. So, the Sublessee has to accept the property in as-is condition or make its own improvements, all of which require the written approval of the Landlord/Master Lessor.
Sound like a hassle?
3. Restricted length
The length of most subleases is restricted to the remaining term of the existing lease, as Options to Renew or Rights of First Refusal can only be executed if the original Lessee still occupies the space without the intent to vacate. As a result, many subleases make for short term bargains, but may precipitate the need to move more often.
With all these potential problems, why would anyone choose to sublease over a direct lease with a new Landlord? If you only need space for a short term and you can find a space that meets your immediate requirement, a sublease could be an option worth the risk.
Or, if the sublease deal on the space you want can be combined with a new deal with the Landlord, you may be able to meet your long term space needs. And in many cases, negotiations can begin as a sublease and conclude as a new lease between the Landlord and the would-be Sublessee as the new Lessee, with the original Lessee paying a negotiated fee for early termination.
As vacancy declines and the availability of quality space diminishes, sublease opportunities will become more prevalent, as some tenants will decide to sublease their existing spaces and move early to accommodate anticipated growth in a tightening market.
No matter what side of the sublease equation you find yourself on, it is important that you be fully informed regarding the potential pitfalls and risks of subleasing. As the most experienced industrial property leasing team in your area, we can help you make the most informed decision. Get in touch with us today.