The Pros and Cons of a Sublease
Tenants who find they have excess space may sublease to your firm, a leasing arrangement that could have cost and timing benefits for your company. A sublease can also have detriments, any one of which could turn out to be catastrophic if you don't assess and mitigate risk ahead of signing. There's a lot to evaluate when you consider this type of situation. Here are some points to think about:
Benefits of Subleasing
- Subleases may potentially offer under market rent. The original tenant typically remains responsible for the lease when they sublease. Since they don't need the space, they may be willing to sublease at a lower rent to offset their ongoing cost. It's also possible rents have increased since the original lease was signed.
- You may benefit from the investment in the tenant's previous buildout. Assuming the space fits your needs without substantial changes, you save the cost of building out the space.
- A sublease may allow the flexibility of a shorter lease term.
- Subleases allow you to move in faster, and if the space is built out properly for your use, you save the time of planning, permitting, bidding and construction.
- A sublease might be easier to qualify for and requires potentially less or no personal or corporate guarantee.
Drawbacks of Subleasing
- The original tenant can only provide the rights to your company that they have in their lease. For example, if you require different signage, property-use type, parking or a longer lease, if it's not allowed in the original lease, the original tenant cannot provide it in your sublease.
- You may not be able to secure rights to extend the lease term beyond the existing term. Since the original tenant typically remains responsible, they are reluctant to provide options beyond their current lease term, even if they have renewal options.
- Since the original tenant is not in the landlord business, they may not be willing to offer an adequate tenant improvement allowance. You may have to pay for some or all the cost to adjust the floor plan or otherwise get the space ready for your business.
- A potentially devastating aspect of a sublease is that it's subject to the original tenant not defaulting. You could be compliant with your sublease and receive notice your lease is terminated because the original tenant defaulted. At that point, you could be subject to the landlord's new terms or be forced to vacate.
One way to mitigate this risk is to ask the original landlord to sign a recognition agreement. Properly worded, the landlord would honor your sublease if the original tenant defaults. The landlord may or may not agree to a recognition agreement. To help the landlord agree, illustrate the benefits—the landlord may feel more comfortable the rent will be paid and the property taken care if your firm occupies the space.
Most subleases require the original landlord's consent. In addition to reviewing the sublease, review the original lease to understand the tenant's rights and the sublease approval process.
About the Author: Michael Bull
Michael Bull, CCIM is an active commercial broker with 30 years and $5 billion in transaction experience. He is founder of Bull Realty, America's Commercial Real Estate Show, and Commercial Agent Success Strategies.
This article was updated on 10/10/2024
