Understanding Your Lease: Subleasing
The day after Labor Day is always bitter sweet. Summer has officially ended, but at the same time, there is a renewed energy back at work. Everyone is working hard the last quarter of the year to ensure they are on track to meet their 2014 goals. It is also when business owners and CEOs find themselves asking, at the end of this year will we see an increase or decrease in our yearly revenue? And, at the beginning of 2015, will we need to hire or scale back our employees?
If the answer is yes to either of these questions, then expanding or contracting your office space is (or should be) on your mind. If you are Verity’s clients you recognize that your next real estate decision will only aid you in meeting your company goals. So, if the best decision is to relocate and expand, or contract, you can always simply exercise you lease Sublease option, correct ? The answer is, Maybe.
You’ve got the right, right? Wrong!
One of the frequent sand traps of a long-term tenant lease are the subleasing clauses. Misconceptions plague this contingency and rarely are they the safety net that tenants believe them to be when they sign their landlord-tenant contract.
Virtually every landlord will offer subleasing rights as a carrot to close a deal. But as they generally retain approval/refusal rights, in many instances, the tenant’s ability to exercise the right to sublease may be at the whim of their landlord.
Common caveats in a subleasing agreement include exclusions based on competitive availability. If there are other spaces concurrently unoccupied within the building, your space poses a threat to securing a primary lease on that property. Thusly, your request to sublet may be denied.
Also, if your landlord has retained the right to screen your potential tenants –even if you feel that you’ve already done a sufficient job of vetting them- management can say “no.”
Some leases contain clauses that permit the landlord, upon notice of the primary tenant’s intention to sublease, to terminate the prime lease on that space.
In instances where the tenant is simply looking to get out of their lease, this can be a beneficial move. However, if business picks up and you again need the space, you will have a problem.
No margins to consider
While it’s not uncommon for some landlord-tenant agreements to demand that the tenant pay 50% of any excess rent above and beyond the primary lease, more onerous arrangements have been known to insist on a full 100%, resulting in no benefit, and only potential liability for the primary tenant.
The landlord spells out timeframes within your lease whereby they will respond to your sublease requests. Often times these important durations are overlooked when negotiating your prime lease. Subtenants seeking subleases are often looking to move quickly and will move on if they need to wait more than a week to hear if landlord will approve their deal.
Any of these particular roadblocks to subletting can have problematic results if your business outgrows or needs to contract its current space, and leaves you with an expensive vacant location, hemorrhaging funds.
Okay, perhaps your landlord does let you sublease some or all of your space. Beware the fine print that exposes you to elements of risk and expense. You are likely to be liable for the following:
- Damage caused by your subtenant
- Repairs to the facilities
- Late or failed rent payments
So as you see, there may be hidden roadblocks to subletting even if you do have a sublease clause in your own contract. And should you be allowed to exercise that contingency, there may potential liabilities that make that option less than appealing.
Read the fine print and, better yet, seek professional counsel to ensure favorable terms & conditions, or to steer you clear of a lease that could negatively impact your business.
Feel free to contact Verity Commercial 703-435-4007 with any questions about your lease or for strategic help for your future office relocation.