Are Sublets Becoming More Common?
Subletting or Subleasing space is an option when a tenant has committed to a lease period with a landlord and cannot fulfill the commitment themselves. If you are unable to make use of space you have committed to paying for, it can feel like you are setting money on fire every month.
A sublease might help to make that situation more manageable. The tenant might recruit someone else to occupy the space and pay rent for the remainder of the period. This “sub tenant”, as they are called, might pay rent to the “master tenant”, or they might even pay the landlord directly and the landlord is required to notify the “master tenant” if the rent becomes past due.
To Sublease or Not?
If you are looking to lease space and you are wondering if you should consider subleasing from someone there are some considerations.
The length of lease you are seeking. Often, subleases tend to be shorter in duration - around 18 months or less. Even if the rate is competitive, this can be unappealing because the last thing you want to do is invest the time and trouble of moving only to move again.
As a “sub tenant” you might be able to negotiate a longer lease directly with the landlord. However, sometimes a landlord does not want to make that commitment, especially if rents are moving up.
Essentially the remaining term you are able negotiate needs to work with your business plan. The new wrinkle that has come with a global pandemic is that there are longer term subleases coming available in the market that are more in line with what you might seek leasing directly from a landlord.
Companies have found their employees working from home and are exiting their spaces which has created a change in what the “typical” sublease looks like. The most recent market statistics from Costar reflect that 45% of the square footage available for sublease has 37 months or longer remaining. If you are looking for space this might benefit you.
The original lease. You are looking to make sure that subletting is allowed, but you are also seeking out details of what is expected of the occupant of the space. Your sublease creates a new legal contract, but the original lease is part of this agreement and it is CRITICAL that you understand the terms of the original deal. You will not have the option to change the original lease terms unless the landlord agrees the new terms are in their favor. If the landlord does approve changes make sure that is well documented.
Good records. Document the condition of the space when you start in writing and with photos. As you pay rent, pay it directly to the party you are instructed to in the terms of the sublease (it might be the master tenant or it might be the landlord), and keep cancelled checks or receipts.
If you are a tenant and want to sublease your space to someone else there a couple of basic precautions.
Remember, ultimately you are the one on the hook to the landlord, so you had better do your homework on a sub lessee before letting them occupy your space. You should get financials and credit history from them and make sure they can pay rent to you for the remainder of the term. The landlord will also want to approve them. The landlord will likely charge a fee for this consideration, and they may also charge for any legal fees they incur because of the process.
It is probably a good idea to have a real estate attorney prepare the necessary documents. Do not get desperate and do this on a handshake.
Read your lease. You may not even be allowed to sublease. And as we pointed out before you will probably need your landlord’s approval of the new occupant (and you will pay for that).
The best way to find a tenant is make sure your sublease is advertised on every Commercial Real Estate platform. This will mean listing your space with a Commercial Real Estate Broker. You can expect to pay that Broker the sales commission for taking care of this transaction for you.
Be prepared to continue shouldering some monthly expense. The market rates to lease your space may not demand what you have agreed to pay in rent, so you may have to accept a lower rate than you are paying. If your agreed lease rate is above market rents you should at least try to negotiate a reduced rate from the landlord. This might reduce the gap between what you are paying and what the subtenant is paying.
Another complication that can arise is if the sub tenant needs to make changes/improvements to the space to make it work for them. You will have to decide who pays for those improvements. You will also need to confirm the landlord will allow those improvements to be made. While everything can possibly be negotiated, you need to be striking a deal that benefits your situation. You are taking on risk and most certainly expense in a sublease and the benefits need to outweigh those.
Subleasing might be the answer for you! Reach out to a Commercial Real Estate Professional like our team at Commercial Property Connect to be sure.
