Looking to sublease an Office Space? This article covers the key points of interest for Subleasing, with specific information for the Lessor and Lessee.
Subleasing is not a particularly prevalent process of Commercial Real Estate leasing and is most commonly practised by sublessors in strife trying to recover costs on a space that no longer holds the same use for them.
On the other hand, subleases provide an opportunity for sublessee businesses to take advantage of a below-market rent and a short term lease.
There are advantages to subleasing for both sublessors and sublessees such as flexible leasing arrangements and reduced rent, but, this type of lease can be peppered with time pressures and difficult-to-match expectations, making the process arduous and heavily involved for all parties.
This Caden Insights article will outline what subleasing is and the pros and cons from both the sublessor’s and sublessee’s perspective.
For a Sublessor:
Is a sublease the only option for recovering costs for my business?
If your business is in a position where your current office is no longer needed, landlords will typically present you with two options: assignment or subleasing of your lease.
Assignment involves having the current lease in its entirety passed on to another entity, meaning that all obligations to the head lessor are forfeited by the assignor. This can be a difficult deal to strike as an assignee has to agree to all the current terms with no further negotiation. Every business is different so these arrangements are few and far between in addition to the fact a new incoming tenant will not receive a financial advantage in a way that they might through a sublease.
Subleasing, however, provides a good opportunity for a sublessor to recover costs on a space that they otherwise might be losing money on. In contrast to an assignment, the sublessor retains its obligations with the head lessor but becomes a quasi-landlord and receives rent from its sublessee. Subleases will typically be at a reduced rental to what the sublessor is paying but can be a great option if there is only a short term remaining on the lease (6 – 24months).
Before putting your space on the market it is important to cover off the below points to ensure this is a viable option and will achieve your targeted results.
Seek your Head Lessor’s consent:
Most commercial leases contain clauses which relate to subleasing or assignment. Therefore, the very first thing to do is assess your lease and/or get legal advice on whether or not you are able to sublease space in your office.
Never assume you have an automatic right to sub-lease or that the Landlord “won’t mind” or “won’t find out”. This would be a major mistake and may cause you to be in breach of your lease, rendering you liable for legal action. Most Landlords will not be able to withhold consent unreasonably but will want to know who is occupying their building and whether or not they’ll affect your ability to continue paying rent.
Talk to a Professional Designer:
Given that there is an above-average vacancy rate in the Brisbane CBD, competition is fierce. In order to give your space a point of difference and give it the best chance of leasing, it is important to consult a professional designer to get some tips on how to best present your space without going overboard.
Often, minor finishes such as painting a feature wall, adding greenery and improving finishes within the tenancy will go a long way to give it a point of difference and ultimately bring the lead times forward and get the space leased sooner. Other than this, ensuring the space is equipped with appropriate workstations and cabling will ensure the space is ready to go for any suitable tenant.
Get advice on building services for complex Subleases:
Office buildings host a range of systems which will all need to be modified if you are looking to go the extra mile to create partition/s in order to sublease part of your floor. Power and lighting will have to be physically separated and new metering installed. Air conditioning services will have to be reconfigured and rebalanced as well as the fire services (sprinklers, exit, emergency lights, etc.) will also have to be rearranged and recalibrated.
You can engage a number of consultants to prepare detailed engineering and building designs for you. Alternatively, contact a specialist D & C team who will be able to take on the whole project on a turnkey basis.
Speak to the Right Agent:
There are about 30 Leasing Agents actively servicing the Brisbane CBD. In order to ensure you are getting the right result for your space, it’s critical to select the right leasing agent.
So you can best achieve this, it’s key to gain an understanding of a number of agents’ perspectives on the market, what rents you can expect to achieve and how they will look to market the space to give it a point of difference.
Top Tip: Don’t choose the agent who promises the best return, this can be an over-promise and under-deliver scenario.
Stay Involved in the Process:
Once your agent has sourced a sublessee and are in occupation, you, as the sublessor are effectively their Landlord. It is critical that you keep in contact with them and provide them with a sufficient property management service for the term of the lease. Communication, as always, is key. Anything your sublessee requires to be repaired will have to go through you to the Landlord.
For a Sublessee:
Should I look at Subleasing an Office?
If your business has any uncertainty around growth or an unwillingness to lock into a longer-term lease, subleasing can be a viable option. In order to achieve the best results, it’s important to be aware of the following:
Understand things may not go your way:
As a prospective Subtenant it’s important to understand that subleases are rarely a simple exercise – sublease deals can often fall over as both parties are looking for the quickest turn-around achievable, but one is chasing a floored-rent, and the other is looking to receive the most rent possible. If some steps are left unchecked (head lessor approval, for example), timing can become a serious issue and handover of keys is delayed.
Once all commercial terms on the Heads of Agreement have been agreed and the deposit has been paid, it’s then up to the sublessor’s lawyers to begin drafting up the leasing documents. As necessary as they are, negotiation between lawyers can slow down this process of a quick turn-around.
In order to ensure all parties get the right result, it’s important to constantly stay in contact with your lawyer for a quick turn-around time.
Be Cautious of Other Costs:
Just like traditional leases, there are other costs that you have to be aware of as an incoming tenant.
Unless otherwise specified, you will still have to take over the sublessor’s cleaning, water and electricity costs, paying for a condition report, legal costs and signage on floor and in the building’s lobby.
Following the end of your sublease term you will be required, in most cases, to return the tenancy in the same condition you received it – this is called a Make Good. Providing you haven’t done any further fitout works to the tenancy, you will typically have to give the tenancy a professional clean and leave it in a clean and tidy manner.
If you have done extra fitout works (for example, built an office/meeting room), these will have to be removed following the end of your sublease term as part of the Make Good.
As a subtenant, if you are doing any extra fitout works, this will be required to be approved by both the sublessor and landlord.
Default by Sublessor:
In most cases, for sublessors, the act of subleasing is a cost-recovery exercise and more often than not they aren’t even covering the costs of their rent in order to accommodate the incoming sublessee.
If your sublessor defaults, it could affect your sublease as well. You can address this by including rights to recover costs and damages if you are evicted because of the sublessor defaulting (e.g, you pay the sublessor rent, but the sublessor does not pay their landlord) in your sublease contract.
This is uncommon but good to cover all bases.
Ultimately, putting a space on the market for sublease may be necessary to assist your business with recouping funds from vacant space. Especially in Brisbane’s 2018/’19 market, it’s unlikely that subleasing will return an attractive rental rate.
However, some rent may be better than nothing, and it is your call as to whether the associated costs with achieving a result are worth some of the hassle.
Before embarking on the process of securing a sublessee you need to ensure that you have done the necessary maths and can justify a rental rate even as low as 50% of what you are paying. This will be further diluted by legal and agents’ fees, and potentially additional fitout works.
If you are looking for a short term office option for your business a sublease could be a great option. As long as you are wary of the limitations and potential property management issues, subleases are mostly favoured by sublessees.