A Beginner’s Guide to Subleasing
Growth is always an objective for businesses. While that’s a good thing, the small office space you’re currently leasing might not be big enough anymore. That’s a problem if you have multiple years left on your lease. This is one situation where you might consider subleasing.
There are three main reasons why a company would consider subleasing: the business is growing; the business is downsizing; or the business has extra office space to offer a smaller company.
The Business is Growing
Let’s say your company leases a space and they have three years left of their lease. Within a year, the company grows and, suddenly, the space they have isn’t big enough. It’s cramped, it’s getting crowded, and the company knows it has no choice but to find a larger space.
With three years left on their lease, however, the landlord isn’t likely to just let them out of their lease, even though they need to find a bigger space. The company finally finds the perfect office space with plenty of room just down the street, but they don’t want to pay rent on both places. An option at this point could be subleasing.
A smaller company wants to use your old space, so you sublease the space to them. They pay you rent on the property and, in turn, you pay the landlord. Everyone is happy.
The Business is Downsizing
It’s not an uncommon occurrence. A new business signs a five-year lease, and from the onset, things are going well. After a year, though, things aren’t looking so great. Money is getting tighter and tighter, and the company is forced to start downsizing.
As the downsizing continues, it’s no longer feasible for the company to stay in its current location, even though they have four years left on their lease. At this point, the company has to find another business to come in and sublease the property, otherwise they’re responsible for the money owed to the landlord.
By having someone sublease the space, the company doesn’t have to worry about defaulting on the lease, which could cause the landlord to sue for the money still owed.
The Business has Extra Space
There are times when a growing company might lease a property that’s 3,000 square feet, even though they only need 2,000. This gives the company room to grow down the road.
In the meantime, however, the company can sublease that extra 1,000 square feet for a year or two, or until they’re big enough that they’ll need the entire space. This helps off-set the cost of the rent and, depending on how much is agreed upon in the sublease, could provide this growing company with extra money.
Subleasing and Your Landlord
Your lease will tell you whether you can or can’t sublease most of the time. It is essential that you check your lease before subleasing. If your lease permits subleasing, the landlord is going to want the ability to control who leases the property. There’s a good reason for that. If you move out of the space, the landlord isn’t going to want questionable businesses, or even those that simply aren’t a good fit, moving into the space.
For the most part, however, landlords will let you sublease the space if the new tenants are complimentary, it doesn’t cost the landlord any money, and doesn’t change the nature of the building. In fact, the landlord might see this as a great opportunity.
If your company has three years left on the lease, the landlord might approach the new tenant and, instead of a sublease, offer them a new five-year lease. By doing this, the landlord can terminate the old lease and have a new, longer lease in place for the new tenant.
Even when a landlord has control over subleases, there can be negatives. For example, finances play a large part for the landlord. If the first tenant has plenty of money to pay the rent, it’s not a problem. However, if a startup, or smaller company, comes in to sublease the property, they might not be as financially secure. In this case, the landlord might be less likely to offer the new sub-tenant a longer lease, and the first tenant will remain on the hook for the duration of the lease term.
The primary tenant who subleases a property is going to be held responsible for all liabilities under the original lease including financial obligations as well as any damages that the subtenant may cause in the space. When the lease is up and everyone leaves the property, the landlord will come in to inspect the area.
If there are damages, they might use the primary tenant’s deposit to fix the issues that are above normal wear and tear. If the value of the deposit is not enough they may ask for more money from the primary tenant to make the necessary repairs. It really is the risk of the primary tenant, not the subtenant, to make sure the subtenant doesn’t do anything wrong.
Assigning the Lease
There is another option to subleasing – assignment. Let’s say a company has outgrown their current space and they decide to move to a bigger location. The owner of the company has a friend who owns a smaller business and is looking for a new office. They like the space and they like the current lease. At this point, they might be able to be assigned the current lease.
When it comes to assigning a lease, an assignment agreement is created which assigns the rights and responsibilities of that lease to the new tenant, the assignee. The assignment agreement is then signed by both companies and the landlord. At this point, the first company is now no longer responsible for the liabilities under the lease and the new tenant is.
Landlords, however, become more particular when it comes to assigning a lease. When they signed the original lease, they signed it with the first company. The landlord knew that company could afford the rent and had no worries about that.
If this new tenant doesn’t have a solid business plan or has questionable financials the landlord may have some doubts as to whether or not they will be able to pay their rent consistently. If this is the case the landlord would not be as likely to sign the assignment agreement because they lose the financial strength of the initial tenant after the assignment. These are things landlords really take into consideration before agreeing to an assignment.
Subleasing can be a difficult process, regardless of what side you’re on. This is why it helps to have someone in your corner who can help steer you away from trouble.
At Rockpoint Commercial, based here in Frederick, MD, we take pride in helping businesses choose the best commercial property. We’re also happy to help those looking to sell or lease Frederick commercial real estate.