Walk out of your office into the hallway and take a peek into the office next door. Is there anybody there? Are you using the office beside you as an extended filing cabinet? Are your summer interns making plans to turn the office down the hall into a brewery? If so, it may be time to consider subleasing a portion of your premises.
Subleasing all or a portion of your unused premises provides both foreseen benefits such as decreased overhead and unforeseen benefits such as the centralization of your staff which can lead to increased camaraderie and further cost efficiencies (imagine two photocopiers instead of four).
Properly evaluating your organization's unique circumstances will ensure your business maximizes profits in the short term while preparing for the inevitable upturn in the economy. A proper evaluation of whether a sublease is appropriate for your organization begins with the following:
1. Conduct a review of your commercial lease
- Standard lease terms will require the consent of your landlord in order to sublet or assign all or a portion of your leasehold premises, which your landlord may not unreasonably withhold. The factors which may give rise to your landlord withholding consent will be many but most often arise when your sublessee's creditworthiness is in question or its use of the premises is either in competition with other tenants or unusual.
- In the event your landlord is able to unreasonably withhold consent for a sublet or assignment, your redress may be limited but your approach should remain identical.
- Ensure your lease does not provide for adverse financial consequences in the event of a sublease or assignment. While not likely given today's depressed economic climate, should you obtain a rental rate over and above that provided for in your head lease, your landlord may be entitled to the excess rental income.
- Make certain that your lease does not allow your landlord to take space back in the event you request their consent for sublet or assignment. While it is unlikely your landlord is interested in adding to their leasable inventory, this type of take-back clause is common.
2. Communicate with your Landlord
- Your lease agreement will require you to provide your landlord with proper notice of any sublet or assignment. Communicating your intention to seek a sublessee ensures your landlord is forewarned of your intention to sublet and provides a glimpse into the willingness of your landlord to cooperate.
- An open line of communication with your landlord facilitates not only cooperation in the event that you find a sublessee, it is also a valuable source of potential sublessees for your premises.
3. Commence your Search
- In addition to traditional methods of sourcing sublessees such as real estate brokers (who will charge commission), be sure to communicate with your suppliers, clients and neighbouring tenants to determine whether they may be interested in a portion of your premises. Remember, the economic crunch has affected the majority of your stakeholders and closer proximity to these businesses may lead to increased business or cost savings in the future.
- While subleasing space can increase profitability in the short term, an improper sublease can lead to negative unforeseen issues which can deter the future growth and profitability of your business. Proper planning and legal strategy can ensure you do not face the following common issues:
- Growth may be hampered in the long-term if the subleased premises are not available for your use when the economy rebounds. Conducting proper due diligence on your sublessee will ensure that a short-term gain does not turn into a drain on your financial and human resources (ensuring their financial viability can prevent future enforcement issues, an evaluation of their intended use will ensure their use is permitted under your current lease).
- Ensure security issues are addressed in terms of both physical barriers and protection of your intellectual property if only part of the premises are subleased.
- Recognize that along with a depressed economy comes depressed lease rates – be prepared to accept a fraction of your current lease rate. Remember, savings on operating costs can be significant as well.
4. Contact your Landlord
- Once you have found a suitable subtenant, seek approval from your landlord using the method set out in your lease agreement. Notice requirements vary from lease to lease – ensure your landlord has been provided with adequate notice so as to prevent any unexpected delays.
- Work with your landlord to answer any questions and alleviate any concerns they may have.
5. Communicate with your legal professional
Properly drafted legal agreements take into account not only those issues which are at the forefront of your negotiations (rental rates, term, use of the premises), but also those issues which may arise in unforeseen circumstances.