Sublease Overview: What is the Best Approach (part 2)

​In the 4th quarter of 2022 we wrote the first half of our Subleasing article, where we covered the overall strategy of subleasing, Master Landlord approval, and the price you should charge.  Now, nearly halfway into 2023 we want to pick up that topic as we continue to see Sublease space on the market increase,   while getting absorbed relatively quickly.  In today’s article we aim to cover what it would look like, in the subleasing scenario, to (i) terminate the existing lease, (ii) what are appropriate commission amounts, (iii) how do we handle rental profit, and (iv) how to address the condition of the Premises.  While we will not cover every aspect of each of these topics, this will give you a good launch point for further discussion as it relates to your unique situation.

When Subleasing, the party that is looking to sublease the space, the Sublessor, is looking for another group to come in and use the space they no longer need and pay the rent they were previously contracted to pay.  However, what many Sublessors would really like is to have this lease go away or be terminated.  This can occur, but it is all dependent upon who is coming in behind you to fill that space.  Questions over credit worthiness, capacity and use all play a role in whether a landlord would be willing to terminate the existing lease and start a new lease with the new tenant, or does the landlord want to keep the current tenant on the hook  too. 
 
When it comes to commissions on subleasing, many factors play a role in what to pay in commissions.  Generally, the more challenging a space is to lease, the more in commissions the Sublessor will need to pay. Landlord’s will generally not participate in paying commissions on subleases, because Landlord’s already paid the commission to lease the space originally.  There are many ways for tenants or Sublessors to save on sublease commission dollars. 
 
Another item that has come up recently, and is a good reflection of a market that has had steadily appreciating rents , is “how do we handle profit sharing of rental income?”  Another way to put this question is ”who keeps the money when the sublease rent is now more than the originally contracted rent the Landlord is collecting?”   The short answer would be that it depends on what the original lease states, but if the original lease does not address this, the Sublessor would keep the profits.  However, this delta could also be used to help negotiate a lease termination (point 1 above).
 
Finally, how to deal with the current and needed condition of the Premises often comes up when entering into a sublease.  Typically, Sublessor’s are not used to  hiring contractors to install carpet, paint and perform other tenant improvement items.  Therefore, what usually occurs  is that the party coming into the space (the Sublessee) will usually take the space in its current condition, subject to standard professional cleaning service.
 
Please note that in   every one of these topics, there are many different ways to handle the  nuances that present themselves.  As always, please contact us today to discuss your situation and what would be the most applicable ways to help you grow your business through using the sublease vehicle. ​