Commercial Subleasing Essentials: What Every Tenant Needs to Know
When subleasing becomes the next option due to an unexpected shift in your company, you need someone who understands the intricacies of the subleasing landscape. We’ve completed hundreds of sublease transactions, and we can help you avoid the unexpected pitfalls.
Here’s how Regent CRE can help you:
- A Smooth Transaction. We understand the ins and outs of each step of the process, and we’ll ensure nothing is missed.
- Superior Market Knowledge. With a deep knowledge of the metro Charlotte area, we’re in tune with current pricing and how to leverage that information to make the best decision for your business.
- Negotiation Expertise. Negotiation documents and lease agreements can be quite complex. Let us help you decipher the complicated terminology.
- Streamlined Business Operations. No matter what change your business is facing, we’ll handle the complexities of the lease so that you can focus on your company.
- Maximized Budget. Leverage our expertise to make the choice that’s best for the long-term financial success of your business.
We’ve walked through the subleasing process with hundreds of business owners, and we’re here to guide you through your commercial sublease agreement with less hassle. Call Regent CRE today!
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Avoiding Sublease Pitfalls: Essential Tips for Tenants
Most tenants who lease a commercial property don’t expect to have to worry about subleasing. When tenants sign a commercial lease, they generally expect to stay in that building until the lease term has ended.
Unfortunately, whether it’s office space, retail, or industrial, though, many businesses inevitably face unexpected challenges or changes that require needing to sublease their rented space. If the direction of your business has changed and you find yourself looking at sublease options, we’re here to help you make sure you can successfully complete the process without running into hiccups or legal trouble.
Leaving a Lease – What Are the Options?
Whether you need more space, less space, or the business is being sold, if the landlord can’t accommodate those spatial needs, subleasing is the most common option.
The COVID-19 pandemic was likely the biggest recent commercial real estate sublease event. During the pandemic, a plentiful amount of office space went on the market for sublease because of the shift from offices to employees working from home.
No matter the reasons for subleases becoming available, landlords want to replace their income stream before letting the initial tenant go. There are two main ways that they can do this.
The first way is to sublease. In this scenario, the primary tenant (the person listed on the original lease agreement) finds a new tenant to move in. The new tenant pays the primary (or original) tenant, and the primary tenant pays the landlord.
The other option is for the landlord to do a buyout. In this scenario, the landlord asks for a certain dollar amount from the current tenant, and in exchange for that dollar amount (which is typically a percentage of commissions that were paid and tenant improvement dollars that were spent), the current tenant is released from the lease agreement. From a risk standpoint, this can actually be a good alternative for the tenant, because they don’t have to worry about issues with potential subtenants, and finding a new subtenant if the first one bails a month or two years down the road.
The Complexities of Subleasing
Subleasing your commercial space can offer a flexible solution to shifting business needs, allowing you to adapt to new market conditions, changing company sizes, new growth projections, or unexpected shifts in strategy or business purpose.
However, navigating the complexities of subleasing requires careful planning and strategic thinking to avoid potential pitfalls that could lead to financial losses or legal issues. Whether you’re looking to downsize, relocate, or simply offset your monthly payments, understanding the nuances of your original commercial lease agreement and the subleasing process is crucial.
This guide aims to equip tenants with essential tips and considerations for successfully subleasing their space, ensuring a smooth transition for all parties involved. From confirming your right to sublease to turning a profit, managing short lease terms, and negotiating lease terminations and tenant improvements, we’ll cover key aspects that tenants should consider to make the most out of their sublease arrangement.
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How Do I Sublease My Commercial Property?
First, let’s cover the basics. If you’re considering subleasing, here are the main steps you’ll need to take in order to complete the process.
1. Review Your Lease and Obtain Landlord Permission
The first step is to make sure that your lease terms allow for subleasing. Keep in mind that the opportunity to sublease is not a default option. In North Carolina, a valid sublease requires written landlord approval as well as a detailed sublease agreement.
Written permission from your landlord can be given in the original lease document or in a separate document. It’s important to note that even if you have permission from your landlord, he or she still has the right to screen potential subtenants.
2. Find a Subtenant
Once you have permission to sublease, your next step is to find a subtenant. You may start with personal business contacts or with online advertising platforms.
Generally, however, the easiest and most effective way to find a reliable subtenant is to leverage the help of a commercial real estate broker.
Remember that in a sublease situation, you’re still responsible for keeping up your end of the contract with your landlord. This includes making payments on time and being respectful of the building. Because of this, it’s vital to choose a responsible, reliable subtenant. Don’t forget to check background history, employment references, and credit score.
3. Create a Sublease Agreement
A sublease agreement defines – at the least – term start and end dates, rental amount and payment method, late fees, early termination fees, security deposit amount, and additional usage clauses.
It’s highly important to make sure that every important detail is spelled out clearly in the sublease agreement. This includes not only the above information, but also a description of the property. Failure to create a comprehensive, detailed agreement can result in legal disputes and costly liabilities.
4. Stay Organized
Once the sublease agreement is in place and your subtenant has moved in, it’s up to you to keep up a good relationship. While expectations should be clearly laid out in the sublease agreement, you must stay on top of ongoing communication with the subtenant. This includes regular rent collection, payments to your original landlord, and keeping an eye on the condition of the space.
Partnering with a local commercial broker can help you ensure that all of your bases are covered so that you can maintain a healthy, successful relationship with your subtenant.
Commercial Subleasing Essentials: 5 Important Questions and Considerations
Now that we’ve gone over the basic steps of the subleasing process, let’s dive a little deeper. These are five vital considerations to help you avoid pitfalls and maximize profit when you need to sublease:
1. Right to Sublease
The first thing you need to confirm is that you have your landlord’s consent to sublease. In other words, that the terms of the original lease give you the right to sublease your space.
Most leases will specify that the landlord reserves the right to review the subtenant’s use of the premises, as well as the financials of the subtenant. In other words, if you have great credit and are a reliable tenant, the landlord isn’t going to want to take on the potential risks of replacing you with someone who has weaker credit. But, most provisions in the least say that a subtenant approval cannot be unreasonably withheld.
Typically, when a landlord is vetting a subtenant, there will likely be a sublease approval fee. This can range from around $500 to $2,000, and covers the landlord’s time to review financials for the new tenant, as well as the time involved with onboarding a new tenant into their property management system.
2. Turning a Profit
Most tenants approach a sublease scenario with the goal of breaking even on their monthly rent costs. If your lease was negotiated at a down time in the economic cycle, your current lease payments may be below market. If your lease does not prevent you from profiting from a sublease, then your lease can be an asset. However, most leases have a provision that prevents tenants from retaining significant profits on subleased premises.
The most common two scenarios are either for any profits to be split 50/50 between the landlord and the primary tenant, or for the tenant to simply not be allowed to lease for more than what they’re currently paying.
However, if the original lease was negotiated in an economic downturn and the rent payments were super low, the property owner may just decide to terminate the lease altogether rather than allowing the sublease to raise the rent to market rent.
This has recently been a relevant activity for industrial leased property, since industrial rents basically doubled in the last 5 years. In these cases, landlords would often decide just to terminate that lease and take it back rather than allow it to go on the market at a lower rate. This is also a favorable outcome for you as a tenant, because you’ll get out of that lease without having to pay a large dollar amount or buy out.
3. What If My Lease Term Is Short?
Even if you have two years or less left on your lease, there are still numerous benefits to subleasing your space to a third party. Once a landlord knows the tenant intends to sublease and there is no chance of retaining their tenancy, the landlord shifts their focus to backfilling the space with a new tenant. Particularly if the tenant is creditworthy, the landlord will consider terminating the current tenant’s lease in order to do a long term direct deal with the new tenant.
4. What about a Lease Termination?
The best case scenario for the tenant is for the landlord to do an early termination of their existing lease and then do a direct deal with the new tenant. This releases the original tenant from a potential liability of having to find another subtenant if the original subtenant were to default on the sublease terms in the future. Creditworthy subtenants that are willing to sign long-term leases are a great asset when negotiating a lease termination with the landlord.
5. Tenant Improvements
If your company has five (5) years or more left on your existing lease, then the most likely scenario is a traditional sublease scenario, rather than the new tenant doing a direct deal with the landlord.
In the event that the subtenant needs modifications to the space or part of the space in order to occupy the premises, there are a few ways this could be handled. Rather than paying for specialized improvements that may hold no value if the subtenant defaulted, reduced rent for a period of time could be offered instead in order to offset tenant improvement costs. If the market is strong enough, you also may be able to negotiate an “as is” deal with the subtenant, being responsible for the cost of any tenant improvements.
Real Estate is Often One of the Largest Expenses for Any Company
Before you make a decision about subleasing, I encourage you to speak with a commercial real estate professional. An experienced commercial broker can help you evaluate your situation, understand your sublease rights, inform you of fair market value, provide you with market options for your next location, and professionally market your current space to obtain the best rates for your sublease deal.
Signing a commercial lease is a legal agreement, and is not something to be taken lightly. Seeking professional real estate and/or legal advice is the best way to stay out of sticky situations, both when signing and negotiating your original lease as well as when beginning a sublease agreement. It’s highly important to understand the ins and outs as well as the potential positive and negative implications of subleasing before you sign a legally binding contract.
Read more about balancing the benefits and risks of subletting your office space in our dedicated blog article.
FAQs About Subleasing
What is the difference between subletting and subleasing?
The terms “subletting” and “subleasing” are often used interchangeably. However, subletting is the process by which a new tenant signs an agreement with the landlord, while subleasing describes a new tenant signing an agreement with the original tenant. In subleasing, the original tenant maintains the tenant relationship with the landlord.
In a sublease situation, you'll have more responsibility. Since you're essentially the middleman, holding a relationship with both the landlord and the new tenant, you'll have specific duties to perform in order to make sure everything goes according to plan. First, it's up to you to create and review the sublease agreement with the new tenant. Then, once the agreement is in place, you'll have the monthly duty of collecting rent from the subtenant and paying the landlord. You'll also be responsible for any damage that happens to the property over the course of the sublease. You'll be released from these responsibilities when the end date of the original lease arrives.
In subletting, you get to put the new tenant in direct contact with the landlord and essentially step out of the picture. They'll either negotiate a new lease agreement or transfer the original agreement from yourself to the new tenant. In this situation, you won't have to worry about providing a new agreement. In a sublet, depending on the details of the agreement, you may be released from all responsibility right away.
The particulars of subletting and subleasing can be overwhelming, but with an experienced broker by your side, you can rest assured that you have a professional making sure all of the details align correctly. This is the best way to keep yourself out of trouble, avoid legal disputes, and experience a positive subleasing or subletting experience.
What are the advantages of subleasing?
The main advantage of subleasing is that it allows you as the tenant to recoup your costs without having to navigate the penalties and charges that go along with breaking a lease. If your business unexpectedly needs to relocate or downsize, subletting can be the best way to recover your expenses.
Another benefit of subleasing is that it can allow you to maintain rights to the property in the case of a short-term relocation or a break from property use.
What are the disadvantages of subleasing?
Subleasing can be risky from a legal aspect. It’s important to thoroughly understand your lease agreement and perhaps even consult a legal professional before subleasing.
In addition, subleasing may require you to attend to certain maintenance issues and be responsible for any damage to the property.
Can you make a profit by subleasing?
While it isn’t impossible to make a profit by subleasing, in most cases, no, subleasing does not allow a tenant to turn a profit.
Most leases have provisions that prevent tenants from profiting on subleasing. If the original lease was negotiated during an economic downtime, the property owner may just opt to terminate the lease rather than giving the tenant the opportunity to profit from a higher sublease rate.
Regent Commercial Real Estate Is Here to Help
At Regent Commercial Real Estate, we’re deeply integrated in the commercial real estate market of the greater Charlotte area. Our comprehensive search database tools, network of relationships, prestigious real estate credentials, and tireless pursuit of your best interests allow us to secure the best deals on commercial properties on behalf of our clients.
Don’t jump into a commercial sublease contract on your own. We’ve done this hundreds of times, and we’re here to help you make the best decision for the long-term health of your business.
For a free evaluation please call Brian Smith, SIOR, CCIM, MBA at
704-910-9518
brian@regentcre.com
