How to Sublease Excess Office Space

Your right to sublease comes from your lease, and the clause that governs it controls everything that follows. Read it with your attorney before you speak to the landlord or list the space.

• ✓Is landlord consent required, and must the landlord act reasonably in giving or refusing it?
• ✓Does the landlord have a deadline to respond, and what happens if it does not?
• ✓Can the landlord recapture the space, meaning take it back and end your lease for that portion, when you ask for consent?
• ✓Must you share with the landlord any rent the subtenant pays above your own rent?
• ✓Are there limits on who the subtenant can be, such as existing tenants of the building or companies the landlord is already negotiating with?
• ✓Are you restricted in how you advertise, including the rent you may quote publicly?
• ✓Do rights such as renewal options, expansion rights or signage pass to a subtenant, or are they personal to you?
• ✓Will you owe the landlord a review fee or its legal costs?
• ✓Does the subtenant’s intended use fit the use clause?

A recapture right is not always bad news. If your aim is to shed the space entirely, a landlord that takes it back has released you from it, which a sublease never does. Know before you ask whether that outcome would suit you.

This is the point founders most often miss. A sublease puts another company in your space. It does not remove you from the lease. You continue to owe the landlord the full rent and every other obligation, whether or not your subtenant pays you.

If the subtenant stops paying, damages the premises or leaves early, the landlord looks to you. Your deposit or letter of credit stays in place. If you signed a guarantee, it stays in force. For that reason the financial strength of the subtenant matters to you in exactly the way your own finances mattered to your landlord.

You also take on a new role. You become a landlord to the subtenant, with the administrative work that implies: invoicing, passing through building charges, relaying service requests and handling the end of the sublease.

Sublease space usually rents for less than comparable space leased directly from a landlord. A subtenant gets a fixed remaining term with no assurance of staying beyond it. It takes the space largely as it is. It deals with a sublandlord that cannot offer a construction allowance the way a building owner can. The discount is the price of those limits.

Your true competition is other sublease space, and the amount of it on the market shifts. When many companies are shedding space at once, subtenants have choices and pricing reflects it. The rent you pay under your own lease has no bearing on what a subtenant will pay you.

Set expectations accordingly. The realistic goal for most sublandlords is to recover part of the cost and to stop paying for empty desks, not to break even. A sublease priced to match your own rent often sits unoccupied while you pay the full amount each month.

Compare a lower rent that leases quickly with a higher asking rent that takes much longer to fill. Every vacant month is a month at full cost, and the remaining term gets shorter and less attractive as you wait.

Subtenants are usually buying speed and simplicity. The closer your space is to ready for use, the wider the pool of companies that will consider it.

• Decide whether to offer furniture, and say so clearly. Furnished space with working conference rooms appeals to tenants who need to move quickly.
• Leave the cabling and, where you can, the network infrastructure in place.
• If you are subleasing only part of your suite, plan the separation: a dividing wall, a separate entrance, access to restrooms and exits, and how shared areas such as the kitchen and reception will work.
• For a shared suite, think through security. A company handling sensitive data or proprietary models needs physical separation of equipment rooms, access control and networks before another company moves in.
• Gather the documents a subtenant will request: floor plans, the master lease with sensitive business terms redacted if appropriate, and a summary of building charges.
• Decide the term you will offer. Most subtenants want as much of your remaining term as they can get.

Marketing a sublease is the same work as marketing any space: listing it where brokers search, sending it directly to tenant brokers active in the area, and showing it properly. Many subleases are filled by a neighbor in the building or by a company already known to the brokers involved.

1. Review the prospective subtenant’s financial position and business as carefully as a landlord would review yours.
2. Agree the business terms: rent, term, furniture, security deposit, and who pays for any work.
3. Have your attorney prepare the sublease, which should bind the subtenant to the relevant terms of your master lease.
4. Submit the request for consent to your landlord with the information your lease requires.
5. Obtain the landlord’s written consent before the subtenant takes possession.
6. Collect the subtenant’s security deposit and evidence of its insurance.
7. Record the condition of the space and the furniture at handover.

Pay attention to the end of the term. If the subtenant stays past the end of the sublease, you can be the one in holdover under your own lease. If the subtenant makes alterations, you may be responsible for removing them. The sublease should deal with both.

A sublease has its own costs, and they should be in the calculation from the start: brokerage fees, legal fees for the sublease and the consent, any fee your landlord charges, the work needed to divide or prepare the space, any free rent or furniture you offer to win the subtenant, and the rent you carry while the space is vacant.

Put the net result next to the other routes. A negotiated buyout ends your liability in exchange for a payment. An assignment transfers the whole lease to another company, though the original tenant often remains liable unless the landlord agrees to a release. Returning the surplus space to the landlord as part of an extension is sometimes possible when the landlord has a use for it. Which route is best depends on how much term remains, how marketable the space is and what your landlord needs.

TAG advises technology, software and data companies on these choices and markets sublease space on their behalf when subleasing is the right answer.