Let me paint a picture and it may sound familiar. You are a small business owner in a tight commercial real estate market. You have grown the company and are looking to hire new talent. Your office space needs have run the gamut. You started out of your home, and then set up shop at your favorite coffee house before reluctantly committing to paying for shared co-working space. Now, finally, you are ready to sign a direct lease for your own office space.
However, there's a problem. Your company's growth is such that it is impossible to predict how much space you will need in six months, let alone over the three to five years most landlords would require. This scenario is quite common in Maine as the bulk of our commercial transactions are driven by small- to mid-sized companies. So for the sake of these business owners and others, let's breakdown what I believe to be the best solution for this common concern: subleasing.
At its most basic level, subleasing gives tenants an opportunity and right to find replacement tenants for their own space if things change. Some companies grow, some shrink, some pivot and need new types of space, and some go out of business. So subleasing is the most effective way to weather whatever transition your company is going through.
In most leases, subleasing is perfectly permissible contingent upon landlord review and approval of the sub-tenant. In some cases, if the new tenant's use and credit is comparable, landlords will even release the original tenant and sign a direct lease with the new tenant.
Most impactful for some of my clients is simply knowing they have this option if things change. It allows them to rest easier and more confidently sign a long-term agreement. I have even put together deals where a client takes more space than they need, anticipating growth but fixed with a plan to sublease excess space from Day 1. Again, this is a perfectly acceptable and legal course of action if written into a lease up front.
It is important to note that subleasing does not relieve the main tenant from any liabilities or requirements of the initial lease. If anything, there are more liabilities and risks. Proper credit and financial background checks are vital. You should also consider consulting your insurance agent about any additional coverage you should carry as the result of subletting your space. You are, in essence, playing landlord and should act as such.
A common provision in sublease arrangements is that the main tenant cannot, in most cases, make money on the sublease. In other words, if a tenant signs a long term deal at $10 a square foot but the market improves and the tenant can now sublet their space for $15 a square foot, the landlord will get some or all of the additional rent. This is an important caveat that should be properly spelled out in the lease, particularly in volatile markets like we've seen the last few years.
Subletting commercial space is a common and important tool. It is best to consult with your attorney or local real estate representative to fully understand its impact and how it may benefit your real estate needs. As your business evolves, rest assured that this lease provision offers you flexibility over the long term.
Justin Lamontagne, CCIM, is a commercial real estate broker at NAI The Dunham Group, specializing in the office and industrial sectors. He can be reached at 207-773-7100 or email@example.com
Article originally published in Mainebiz, March 7, 2016, http://www.mainebiz.biz/article/20160307/CURRENTEDITION/303029992/how-to:-sublet-your-way-around-a-commercial-real-estate-shortage