If you've ever read a commercial lease, you know that terminating the lease early is very expensive. Often, the termination fee is just the remainder of the rent for the entirety of the lease. Given that level of expense, it's not surprising that many commercial tenants would rather sublet their space than have it sit empty. However, if you're thinking of going this route, it's crucial to educate yourself on the commercial sublease first. Read on to learn more.
What is a commercial sublease?
To start, if you've ever rented an apartment, you likely already have some idea of how a sublease works. In residential real estate, the subleasing process is more commonly known as subletting. Both terms refer to the act of an original tenant renting out their leased premises to another tenant. Typically, in this situation, a sublease agreement will be put in place between the two tenants with the landlord's consent.
Beyond that, though, the commercial subleasing process is very different than the one that governs a residential lease. For one, it's more common to sublet space in commercial real estate because a commercial lease agreement usually lasts for several years. For another, most of the legal protections which are afforded to residential tenants -- such as a cap limiting the amount that can be charged for a security deposit -- do not exist for commercial leases. Therefore, it's much more important to be able to successfully negotiate a commercial lease.
What are the risks of subletting a commercial space
With that said, it's important to note that subletting a commercial space does come with an inherent amount of risk. In fact, no matter where you stand in the transaction, there are risks involved. To that end, we've laid them out for your consideration below. Take a look so that you have a better idea of how to protect yourself and your interests in this process.
Risks to the lessor
Of the three parties involved in this type of transaction, the property owner faces the least amount of risk. Although many states have laws preventing you from "unreasonably" withholding your consent for a sublease, many states also require that the existing tenant get the landlord's permission before subleasing to another business owner. In addition, it's important to mention that any subleasing agreement that exists will remain subordinate to the original lease, meaning that you still have the option of terminating the lease with the prime tenant, which would terminate the sublease as well.
However, with that said, you still need to take steps to protect your interest in this matter. In particular, make sure that the sublease clause in your rental agreement requires that you give your consent before your existing tenant can bring in a sublessee. When it's time to give your consent, you want to be sure to review the prospective tenant’s financials carefully.
Risks to the sublessor
To be honest, as the original tenant and sublessor, you're likely going to be the one taking on the most risk in this scenario. Remember, any sublease agreement that you make with your tenant is going to be subordinate to the underlying lease, which means you're still on the hook for paying the base rent and any fees if your tenant defaults. In addition, many landlords choose to maintain "privity of contract" if they do choose to allow a sublease agreement, which means that you would be responsible for facilitating any communication between the landlord and your tenant.
With that in mind, before you decide to sublet, you're going to want to read over your existing rental agreement to ensure that you're not doing anything that might violate the lease terms. Then, you're also going to want to take extra special care when it comes to qualifying your renter. In this case, since your wallet is on the line, it's crucial to make sure that your sublessee is more than qualified.
Risks to the sublessee
Finally, there are also some risks to the sublessee. In this case, the sublease term is subject to the master lease, which means that if the landlord decides to terminate their lease with the prime tenant, you could be forced out of the subleased space. In addition, since your agreement is subject to the terms of the original lease, you may not have as much freedom to customize the space or to negotiate many of your own lease terms.
If you're thinking of subleasing, the best thing you can do is request a copy of the original lease. This will give you a clear picture of any obligations to which you may need to adhere. In addition, you should make an effort to negotiate for specific terms in the sublease agreement that meet your needs.
What are the steps to subletting a commercial space
That said, despite the risks, it may still be worth it to look into subleasing. To that end, if you think subleasing might be the right way to go for you, read on below to learn more about the steps involved in subletting your commercial space.
Check your lease
As stated above, the first thing you need to do is check your existing lease. Doing so will give you a better idea of whether or not subletting is allowed under your existing lease terms. It will also help you clarify whether or not you need to get permission from your landlord before you can move forward.
Carefully screen potential tenants
Once you've gotten the go-ahead, the next step is to screen potential tenants. In this case, reviewing financial statements is a good way to go. However, in addition to that, you're still going to want to do your due diligence in researching the company and its industry. This is one instance where the more due diligence you do ahead of time, the more headaches you can save yourself later.
Negotiate the sublease terms
After you’ve found a potential tenant you think might be a good fit, it's important to negotiate the terms of your sublease. Will it be a net lease, a gross lease, or a modified gross lease? How long is the sublease term? Will the new tenant be responsible for any build-outs? In this instance, you can refer to your own lease to give you some direction on the finer points that need to be discussed.
Finalize the contract
If you and your tenant can reach mutually agreeable terms, the last step is to finalize the contract. Here, you'll both sign off on your commercial sublease agreement and, at that point, you can rest easy knowing that you didn't have to pay a large fee to terminate the lease early.
The bottom line
Though subleasing a commercial space is not without its risks, it can also have many benefits -- especially for those who are facing the prospect of a large termination fee. With that in mind, use this as your starting point of reference for the subleasing process. However, if you have more specific concerns about how subleasing will affect you, it's a good idea to speak to a real estate attorney who can look at the specifics of your situation and offer individualized advice.