Many people ask me why, with rents so much higher today then they were a few years ago, aren't more people subleasing their space? It would seem that the opportunity to get free cash would be one that few would pass up. The truth is, subleasing isn't quite as great as it seems. There are 3 reasons for this, 1) the landlord makes it that way, 2) there's additional risk, 3) it costs money to sublease. Today I'll address the first reason.
1) In every lease I've seen, a tenant has the right to sublease and the landlord cannot "unreasonably withhold" his/her consent. However, there are many qualifications attached to this statement. Here are some common ones that may not surprise you:
- The sublessee has to have good credit
- The sublessee's use of the space must comply with the use permitted in the lease
- The sublessee must not be a current occupant of the building or any other building the landlord owns (try to get rid of this one if you can)
- The sublessee must not be someone already negotiating to lease space in the building
- The current tenant must reimburse the landlord for any costs incurred in subleasing the space
- The space cannot be advertised for less than advertised space in the building (try to get rid of this one too)
- The sublease must not allow anything that is not allowed in the overlease
Here are some other common qualifications that probably will surprise you:
- Landlord's right to recapture - In the event that the tenant delivers a signed sublease to the landlord, the landlord has the right to cancel the tenant's lease and either lease the space directly to the proposed subtenant, or lease it to someone else. Generally the landlord has a time period during which they may decide if they want to allow the sublease, deny the sublease, or recapture - 30-45 days is typical. As a tenant, you'll want to avoid the landlord's right to recapture, and if you can't get rid of it, try to reduce the review time. Let me explain why:
1) In a good market, the market rent will be significantly higher than the rent in the lease, and likely higher than what a tenant will sublease there space for. This makes potential subtenants weary of entering into a sublease transaction. The potential subtenants could spend thousands in attorneys fees and months negotiating a sublease only to then wait an additional 45 days for a landlord to decide if he/she is going to recapture, and then have the landlord recapture! If the landlord recaptures, they may be stuck with doing a direct deal at a much higher rent than they planned, or they may have to walk away from the deal.
2) Broker's are weary of showing a tenant space where the landlord has the right of recapture. They may put in a lot of work only to have the deal fall through, and they don't get paid for all of that work.
3) The recapture process makes the whole sublease process take longer which means more time without rent for the sublessor.
All of this said, having the landlord recapture your space isn't such a bad thing . . . it gets you off the hook for the lease and assuming you're not in the business of being a landlord this should make you happy.
- Sublease profit - The lease may stipulate that in the event the sublease is for a higher rent than the rent in the lease, the landlord may get all or some of the profit. This clause is critical, and it is important that you understand it. You should try to negotiate to be able to keep at least half of the profit on a sublease. Also, make sure that any profit that goes to the landlord is paid after attorney's fees, brokerage fees, improvements made to rent the space, cash allowance paid to the sublessee, and free rent offered. Finally, often times the landlord will insist that he/she receives ALL money received for the purchase of Tenant's fixtures, leasehold improvements, furniture, furnishings or other personal property over the transaction costs. This may seem completely unreasonable, but there is good reason why landlords include this clause. Sometimes tenants avoid paying profits on a sublease to the landlord by receiving large payments for furniture and fixtures. The best way to avoid handle this clause, is to say that the landlord will get his/her share of the profit made on the furniture/fixtures above the "fair market value" of said furniture/fixtures.
In my next post I'll cover risks and additional costs.