Considering Subleasing Space?

By James A. Schnur, CCIM
President and Designated Managing Broker
Integrated Real Estate Solutions

After a year of adapting working styles and conditions to accommodate the COVID-19 pandemic, businesses continue to search for ways to offset the burden created by the coronavirus. One of the most difficult aspects for many companies to deal with is the question of what to do with their current office space. Due to stay-at-home and social distancing guidelines, many office spaces have continued to fall short of their previous occupancy — if employees have returned to working in-person at all — leading business owners to search for alternate solutions for their mostly empty spaces. More than ever, this has led to businesses exploring the option of subleasing their office spaces.

The concept of subleasing space will lend itself more readily to certain businesses, spaces, and industries more than others, so it is not an end-all, be-all solution for every organization. For those companies that see it as a viable option, and wish to explore the idea, there are a few tips to keep in mind before committing to subleasing.

Check Sub Lease Terms

Not every lease allows a tenant to sublease their space. If a sublease clause is not contained within the lease, then a renegotiation about lease terms will need to take place with the landlord prior to initiating a sublease. Given the current circumstances, some landlords will be more amenable to the idea of subleasing now than they may have been before, but it’s still a non-starter until the clause is officially agreed upon and included in writing.

 Know Your Lease Restrictions

If retaining a sublease clause is the first step, then the second is understanding the parameters of the clause. Most sublease clauses will include restrictions — whether dealing with maximum subleasing durations, restrictions on types of tenants, or other boundaries as outlined in the lease — and it’s important to understand these terms before signing on a subtenant. Occasionally, these terms can be renegotiated with the landlord, but other factors may play into the restrictions, such as local zoning codes. This is also why it’s important to thoroughly research the subtenant’s business.

Understand the Risks

Signing on a subtenant can reduce a large portion of the financial burden for a business, but that does completely remove the other obligations of being the primary tenant. If the subtenant defaults for any reason, the financial obligation returns to the primary tenant. Additionally, any modifications the subtenant makes to space will likely need to be reverted by the primary tenant prior to relinquishing the space at the end of their lease.

Don’t Overlook the Expenses

Preparing an office space for a subtenant will incur additional costs for a business, including moving and relocation costs, potential maintenance fees for issues within the space, and attorney’s fees. Additionally, even with a subtenant, the primary tenant can still be responsible for maintenance fees (particularly for building common areas), some utility fees, and at least a portion of rent.

Secure Help Before Subleasing

The documents and contracts for subleasing are particularly involved, outlining the delicate relationship — financially and professionally — between the landlord, the primary tenant, and the subtenant. Due to this complex, intertwined agreement, businesses will, in addition to professional real estate advice, need legal advice regarding how aspects of the sublease clause and sublease contracts are defined, particularly around areas of insurance, indemnification, and shared costs.

Trying to navigate the tricky waters of subleasing alone can be too much for most businesses, which is why bringing on an experienced commercial property representative can help. A commercial property representative, such as Integrated Real Estate Solutions, Inc., will work on behalf of your business to ensure your unique needs are being championed during the subleasing negotiations, providing primary tenants with the best possible terms before committing to a sublease. While understanding all the complexities of the sublease agreement can be daunting, understanding that your business has a partner in IRES to guide you through the process will make the terms easier to parse and the process easier to accomplish, with the best possible outcome for your continued business success. 

Integrated Real Estate Solutions, Inc. provides clients with the in-depth knowledge and experience that is critical to determine the right path to your next move, lease renewal, or strategic repositioning of your real estate portfolio. Contact us or call 847.550.0160 today about your needs, and put our success to work for you.

Author: Jim Schnur

Jim Schnur is the President and Designated Managing Broker of Integrated Real Estate Solutions, Inc. Jim started the firm in 2003 after almost 20 years negotiating and overseeing real estate transactions at Hewlett Packard Co. and Agilent Technologies, Inc.