Subleasing doesn’t have to be a dirty word – here’s how both tenants and landlords of commercial buildings can stand to benefit from a sublease arrangement.
In our last post, we touched on the issue of subleasing industrial space and how most leases contain provisions for subleasing if it becomes necessary.
The process, however, is more complex and there are three parties to the transaction rather than the two involved in a direct lease. In this post, we take a closer look at how to use the sublease provision to terminate a lease on space that is no longer needed and, in the process, create a situation that is best for all concerned.
Most tenants believe that once they sign a lease they are stuck in the space until the lease expires. While that is true to a point, the sublease provision contained in most leases offers a way out. Typically, the tenant lists the property for sublease with a qualified professional, a qualified subtenant is identified, terms are negotiated and that agreement is presented to the landlord for his review and “reasonable” approval.
It’s getting the landlord’s approval that can be the tricky part. Generally, landlords prefer to work directly with the occupants of their buildings, and frown on subleases for that reason. Depending on market conditions, this preference can be used as a catalyst for creating the best of potential outcomes: a termination of the existing lease and the creation of a new direct lease with the landlord.
In this scenario, the existing tenant gets himself “off the hook”, the landlord gets a new lease on potentially more favorable terms and the subtenant/new tenant can negotiate a length of term unhindered by the previous agreement. Everybody wins, right? If only it were that simple.
Actually, this scenario is quite popular today given record low vacancy and rising rents. Landlords see it as an opportunity to update their lease terms to reflect the current market. Tenants looking to get out of unneeded space are anxious to get the lease liability off their balance sheets, as subleases do not relieve the tenant/sublessor for any obligation to perform, even if it subleased to someone else.
In a sublease, the landlord has both parties “on the hook”.
The landlord’s willingness to play ball is the key component to the transaction. Will he consider the termination? If so, what compensation will he demand to tear up the existing lease? What will he demand from the new tenant in terms of rent, length of lease and other terms?
Is he open to negotiating a tenant improvement package for the tenant? Will he acknowledge the role of the broker in the transaction? The list goes on and the answers are best obtained before this option is pursued.
The final lease termination agreement usually contains a reimbursement to the landlord for unamortized real estate commissions and improvements, along with a termination fee that can be the equivalent of several month’s rent. Many tenants see this as the best solution because it ends the relationship with the landlord and the lease is no longer on the books. Landlords continue their direct relationship to the space occupier, and in today’s market conditions, they collect more rent. The would-be subtenants pay the premium, but that would be the case no matter where they end up.
While it may seem counter-intuitive, the more time left on the lease, the better it is for the tenant looking to get out of his space. With rents rising so fast, they are paying an under market rate in a matter of months after signing their lease. That fact is not lost on savvy landlords.
In fact, we see more landlords approaching their tenants with the idea of terminating or renegotiating leases years ahead of the termination date.
Tenants are all-ears as they know that space availability is tight now and is expected to remain so for the foreseeable future.
The foregoing scenario is just one of the options open to tenants whose space no longer fits their needs. Every situation is different, but it is important to know what the options are at all times. That’s where we come in. To learn more, just give us a call. We are here to help.