There are a number of reasons why businesses decide to sublease their space. For those that no longer need their space due to changes in their business models, subleasing is the primary mechanism for offsetting the remaining portion of their lease obligation. Others use subleases to meet a temporary need or to test new markets. Subleasing can be cost-effective and often requires a shorter-term commitment. While subleasing may sound simple and straight forward, there are several pitfalls you need to consider regardless of which side of the table you sit on.
Complex & Slow Process: The time it takes to negotiate the business and legal terms of a sublease can be the same as (or longer than) a direct lease. Added complexities of negotiating a sublease include: legal review and understanding of the master lease, landlord (master lessor) review of the subtenant’s (sublessee’s)creditworthiness, master lessor profit sharing rights and SNDA negotiations.
Term Flexibility: The sub-lessee has limited control of the term of the sublease. This is because the master lease will have a fixed expiration date, or the original tenant (sub-lessor) may have plans to phase back into the space at defined dates. Either way, flexibility on the sublease expiration date and/or termination option(s) is unlikely. In some instances, the master lessor will negotiate a new direct lease with the sub-lessee for a term extending beyond the sublease, but few are willing to do so, as future market conditions are difficult to predict.
Renewal & Expansion Options: In most leases, the sub-lessor typically gives up the right to exercise any renewal or expansion options when they sublease their space and therefore, have no renewal rights to pass on to a sub-lessee. This offers little assurance for a sub-lessee that it will be able to remain in a location long-term.
Tenant Improvements: Subleases are typically offered “as-is” and it is unlikely that a sub-lessor will agree to offer additional capital to make desired modifications. While sublease spaces are often marketed as “plug & play”, rarely do they suit the exact needs of the sub-lessee. What may feel like small modifications (moving walls, resizing conference rooms and furniture upgrades, etc.) can add up and make subleasing much more expensive than initially contemplated. The sub-lessee will either need to live with a sub-optimal space or make its own capital investment with no long-term occupancy rights.
Design Changes: Subleases will often have restrictions on what changes to the design of the space are permitted. Both the master lessor and sub-lessor; may, for whatever reason, wish to restrict design changes which limit flexibility for the sub-lessee.
Lease Restrictions & Landlord Approvals: Anything that requires master lessor approval, per the master lease, will involve a multi-layer approval process, which is often slow and inefficient.
Services: Subleases do not always include services provided to the original lessee. Services such as cleaning, utilities, security, IT, office equipment, repairs and maintenance may all need to be separately procured.