Many companies are looking for ways to reduce costs associated with their leases. One common way to accomplish this is to reduce the lease footprint, either by seeking a reduction amendment to the lease or by subleasing a portion of one’s space. With leasing activity just starting to rebound, many landlords will be reluctant to reduce a tenant’s space, as new tenants are difficult to find. This combination of factors makes subleasing more attractive to both the tenant and landlord.
As a tenant, there are a number of items you must consider when negotiating a sublease. Keep in mind that a sublease does not only affect the parties to that agreement, but also the ultimate landlord. Below is a list of three key considerations all parties should keep in mind.
1. What does the lease have to say? Most commercial leases will directly address a tenant’s ability to sublease its space to third parties. Landlords may either completely forbid the practice or require that the tenant seek approval of any proposed sublease. It is important that a tenant gives careful consideration to these provisions so as to avoid going into default under the master lease.
2. Is the subtenant’s proposed use permitted by the lease? Even if the lease permits the subleasing of space, a proposed sublease may still cause the tenant to default on the master lease. Most leases, particularly in the retail context, have a use clause that specifies what types of business may be carried out in the space. Furthermore, many leases will list prohibited uses (often based upon exclusive use provisions in the leases of other tenants in the development). For instance, say a sportsclub wanted to sublease space to a juicebar in its facility. That tenant must both evaluate whether its allowed use provision would permit such a practice and whether a juicebar is prohibited from leasing space in the center. Imagine if the use provision read, “Health club facility featuring athletic classes, weight training, sports and fitness activities.” That use provision does not provide for the sale of juice beverages on the premises. Further imagine that a Jamba Juice is located two doors down in the shopping center. It is likely that Jamba Juice has an exclusive use provision that prohibits the landlord from leasing space to competing juicebars. It is essential that a tenant be mindful of these potential issues before commiting to a sublease .
3. Who pays for modification to the premises? When a tenant enters into a lease, one primary negotiation point is the tenant’s improvement allowance to customize the space to its needs. Landlords are in the business of entering into new leases and their business model and leasing rates are built to accomodate the costs associated with tenant finish-outs. However, when a tenant enters into a sublease with a subtenant, the roles are less defined. Most tenants are not positioned to front build-out costs to a subtenant. A tenant considering a sublease should consider these costs and its preferred method of addressing construction before seeking a subtenant for its space. Related to construction, a tenant must also consider how a subtenant’s construction will affect the business operations of the tenant in the space. Noise, congestion and debris/dust can have a material effect on the productivity of employees or the experience of a retail customer.
The above list captures just three of the dozens of issues specific to subleases. The parties have unique criteria for their negotiations, as much is determined by the underlying lease. While subleasing may be the best path to reducing costs or providing new services to customers, it requires the cooperation of three parties (the landlord, tenant and subtenant) to ensure the sublease’s success.
