Some tenants think that subleasing office space is a more attractive alternative to signing a direct lease in an office building. For example, a tenant may find better space or a shorter lease term with a sublease versus direct lease. However, tenants should consider some potential challenges to subleasing before signing a letter of intent. Our motto is “every sublease is different.” Here are some things to think about.
- Time and Cost: Subtenant’s counsel will need to review the prime underlying lease as well as the sublease agreement. In many cases, counsel will also need to review and negotiate a landlord consent agreement as well. Therefore, the document review and negotiation for a sublease may wind up being as, or more, time consuming and costly versus negotiating a direct lease. If the lease provides that a separate approval process has to occur before the landlord will consent to the subtenant’s right to signage, premises alterations or parking, for example, counsel should identify such sections of the lease and seek consent from the landlord (in writing of course) to anything the subtenant expects to be permitted to do during the sublease term.
- Landlord’s Consent: Many leases prohibit a tenant from subleasing without landlord’s consent. Some landlords are not incentivized at all to agree to a sublease (or do so quickly). If a tenant needs access to space quickly, the timing of the sublease and consent process may not be ideal. Furthermore, depending on the terms of the sublease, the substance of the landlord consent may be critical and require careful negotiation.
- Communication: Some landlords will provide consent to a sublease but will also include a restriction on subtenant communicating with the landlord directly. In other words, all requests or concerns that a subtenant has must be communicated to landlord through the original tenant/sublandlord during the sublease term. What happens if the sublandlord ignores requests or delays or, far worse, files for bankruptcy and there is no one for subtenant to communicate with quickly? Although reasonable landlords will often talk to subtenants during the term of a sublease, consider what provisions and remedies need to be included in the sublease and landlord consent to avoid a difficult communication roadblock.
- Underwriting: Subtenants should be prepared to provide financial information and other items to a landlord for approval. Many leases require tenants to deliver such items to the landlord for review before the landlord will consent to the sublease. Of course, we recommend obtaining an NDA or other confidentiality agreement before providing sensitive documents to the landlord.
- Cost of Pursuing Remedies: No matter what you negotiate in a sublease or landlord consent, keep in mind that the cost of exercising remedies that require you to engage counsel may be far in excess of what is best for your business bottom line. To the greatest extent possible, try to build remedies into the sublease or landlord consent that allow for simple actions to be taken to address problems that may arise during the sublease term.
To be clear, we do not intend to address issues related to subleasing space from flexible office providers like Regus or WeWork in this article. Our view is that flexible office leases fall into a different category of lease transactions.
WHY SHOULD LANDLORD’S CARE ABOUT THIS? Well, depending on the situation, a landlord may not have to. We get that. This is particularly true when a lease provides that the original tenant remains on the hook for lease obligations despite the landlord’s consent to a sublease. However, it might be wise for a landlord to engage with the subtenant in a reasonable manner if there is a possibility that a sublease could turn into a direct lease in the future. Furthermore, it is better business to have a good relationship with anyone occupying space in your building so goodwill can enable communication about issues a tenant might observe in a space that a landlord may not be aware of on a day to day basis. Additionally, to the extent community reputation matters to a landlord, brokers and tenants talk and with the ever present possibility of market shifts, better to be known as the landlord that reasonably engaged with subtenants from the start. Finally, if a building is financed, our view is that landlords should always establish the best relationship possible with all occupants in the event loan compliance requires any requests of tenants or subtenants. Either way, a landlord should at least understand why the items above are critical to subtenants instead of taking the position that a subtenant is simply asking for “too much.”