Growth is not linear. There is a lot of uncertainty in building a business, particularly when it comes to headcount. There may be situations where you’ve taken on more space than you actually need, or you need to move FAST but have time left on your current lease. Subleasing your space is the best way to solve this very common problem.
The following post is a guide on what that process involves. Ultimately it comes down to the relationships you have with each party. A good commercial real estate broker will be able to keep those relationships healthy by working on implementing protections regarding the risks involved.
What are your lease obligations?
The first step is for your broker to review your lease thoroughly. This exercise will enable them to understand what liabilities you have. For example, you may not even be entitled to sublease your space. If you have two floors and only want to sublease one – does your lease allow for that? Are you only allowed to sublease to certain types of tenants? These questions, and many more, are what your broker will evaluate in your lease.
Being aware of the obligations you have to your landlord before you start the process will save you a lot of time and mistakes down the road.
Before bringing your space to the market for sublease it is advantageous to find out if your landlord will agree to terminate your lease but be advised that it’s totally dependent on the kind of market you operate in. If you’re paying way below market value, then the landlord may be happy to terminate the lease. If they have a tenant in the building that is growing, the landlord may terminate your lease in order to keep a relationship with that growing business.
Promote your space.
You’ve figured out what your obligations are to the landlord, the next step is to put your space on the market. If you’ve been in the building for a few years you’re probably paying lower rent than any other new spaces available in that building which can be a major advantage when looking for a prospective tenant who is likely evaluating more expensive alternatives.
Even if you are paying lower rent than the market suggests, you likely can’t profit from your sublease. In most cases, you will be permitted to recover the full cost of your rent and any brokerage, legal or administrative fees you incur that are directly associated with the sublease. We are seeing companies achieve full recoveries on a sublease in many cases in markets like downtown Toronto (subject to location and quality of the finishings).
In order to ensure you avoid the challenge of paying double rent (this can happen if you are concurrently moving your business to a new location), you must give your broker adequate time to promote your space before you need to move out. The amount of time required to sublet your space will be determined by factors such as the current market conditions (i.e. is it a fast-moving or slow-moving market), the location of your space, the size of your space, etc.
Find a subtenant.
Once you promote your space, you’ll have to find the right subtenant. This is an important step because you’ll accept rent from this subtenant, which will form part (or all) of the rent that you’ll pay to the landlord. If your subtenant goes bust after 3 months, you’ll still be obligated to pay for the remainder of that lease. There are a few things to be aware of when choosing your subtenant:
Financial Statements. Do they have sufficient revenues vs. operational expenses to pay for the remainder of your lease? In the case of a start-up, their financial covenant will be more difficult to justify. Your broker will help you negotiate some further leverage like a bigger deposit so that you feel more secure.
Use of space. The subtenant may need facilities that you don’t have. This could include a boardroom, kitchen or even a laboratory. Any construction your subtenant carries can ultimately be your responsibility.
Type of business. There may be stipulations to what type of business you can sublease your space to. If, for example, a law firm occupies a large part of that building, you may not be entitled to sublease your space to another law firm.
Present the subtenant to your landlord
You will put in the work to find the right subtenant and put a binding offer together. The final stage is to present this subtenant to the landlord. If you and your broker have done a good job in finding the right tenant, then the landlord will consent to you subleasing the space to them. The landlord holds the power here. They may reject your subtenant, change the conditions of that subtenant agreement, or decide to allow you to terminate your lease after all. Tt’s likely that they won’t make this decision until you’ve presented the subtenant to them.
Congratulations – you’ve become a sublandlord!
You’re ready to move onto a new space and the landlord has consented to your new subtenant. However – you’re not absolved of any obligation to you landlord just because someone else is making rent payments. The new business who comes in to take over your space becomes your tenant, and you become a sublandlord. The main landlord will have no interaction or involvement with the business who moves into your space (the subtenant).
This obligation is the reason while relationships in sublease scenarios can be tested if something is missed.
Subleasing your space is a very viable option for when your current office no longer fits your needs. Every sublease situation will be different depending on timing, the state of the space and the purpose. Don’t go it alone. Your broker will make you aware of the anticipated outcome upfront, protecting your potential downside risks. Get in touch at [email protected] and one of our brokers will be able to give you some no-obligation advice on how to navigate this process.