We often receive questions about whether or not a company should sublease its office space. Given the current economic environment, subleasing may or may not be an appealing option for your company.
You might consider subleasing for a variety of reasons, but it’s important to fully understand the benefits and drawbacks of it, while also considering legal implications.
Subleasing can be a complex solution to optimizing your real estate portfolio, which is why working with a trusted broker is essential when looking at your options. If you’re weighing the option of subleasing your office space, keep reading to ensure you’re prepared for the process.
Is subleasing the best option for your situation?
The first step is to evaluate the “why” behind your decision. Most often, companies pursue subleasing for one of two reasons: either they’ve outgrown their current space and need to move, or the opposite—they’ve downsized and no longer need the same amount of square footage. In either case, the goal is to save money.
Next, you’ll need to identify just how much space you want to sublease. Are you looking to sublease a portion of your space? Or are you trying to sublease the space in its entirety? If you’re looking to sublease the entirety of your space, then you should review your lease and assess if you have any termination rights. Another option may include an attempt to negotiate a lease buyout with your landlord. This process, however, is typically capital intensive and not always realistic.
Once you’ve identified whether or not subleasing makes sense for your unique scenario, you’ll need to consider any legal implications.
Subleasing Legal Considerations
While certain items are pretty standard across all lease agreements, each contract is different and the best way to effectively navigate the legal process is to partner with a trusted real estate advisor. To start, here are some of the legal considerations you’ll want to be prepared to discuss.
- Termination rights. Depending on your original lease agreement, you might be able to pay a fee to get out of your lease. This could be a portion of your rent, remaining lease-up costs, or some other set amount—either way, this number may be predetermined and included in your lease. This is typically the most ideal solution but, as stated above, it requires a large amount of upfront cash especially if there is a significant amount of time left in your lease.
- Profitability rights. In some cases, if you were to sublease for a higher rental rate than what you currently pay, you could be required to share the profits or a percentage of them with your landlord..
- Liability. In just about every sublease scenario, you, the original tenant, are still held liable for the remaining rent obligation, the condition of the property, and any damages. If the new tenant has significantly better credit than you, it’s possible you can negotiate an improvement in these terms. In extremely rare cases, you might be able to eliminate yourself from any responsibility. This is called novation—when you find a replacement tenant and they take over obligations and liability completely.
- Landlord approval. In most cases, the sublease agreement will be subject to landlord approval. Please be aware of this requirement and plan accordingly when developing a plan.
Approaching Subleasing: Step-By-Step
- Speak with a real estate advisor to identify your unique needs. They’ll be able to help you identify whether or not subleasing is the right fit for your business and navigate the process.
- Sublease listing. Once you’ve determined you want to pursue subleasing, your advisor will draft a sublease listing agreement for you to review and sign.
- Tour the office to take photos and confirm the floorplan. Next, your advisor will meet with you to tour the physical space and take photos and videos for marketing use. At this step, your advisor will likely ask for a key fob to allow for easy access when tours are scheduled. You’ll also need to determine what office supplies and furniture come with the space. Plug-and-play options, where subleases include furniture and minimize downtime, are often more desirable to incoming tenants.
- Prepare marketing materials. Now it’s game time. Your advisor will prepare marketing materials to showcase your space and once they’ve received your approval, will post the listing online and send email blasts to the brokerage industry.
- Promotion. At this point, the task of subleasing your space lays with your advising team. This step is why you work with a broker. While your broker will help you navigate the legalities and negotiations, promotion is what gets the ultimate job done. When you partner with Allegro Real Estate Brokers & Advisors, your listing will be promoted in weekly newsletters, via social media, and directly to local brokers who are assisting clients to secure space. Any discussions are recorded in a daily updated sales pipeline to ensure no lead gets lost in the mix.
- Request for proposal. Finally, you’ll start to see proposals roll in. During this step, your advisor will work with you to negotiate and reach an agreement. Once finalized, your advisor will support your lawyer to draft any binding documents and secure final approval from the landlord. At the end of this stage, all parties will sign the agreement, completing the subleasing process.