Thursday, January 5, 2012

Ability to Sublet

Next segment in our Leasing Series…Ability to Sublet.

The area of subletting premises is generally provided for as a standard leasing term in most lease documents. In cases where Tenants wish to relocate out of a particular area or wish to cease business operations, this gives them the opportunity to market the space to other commercial users for the balance of the current term.

Areas to be clearly considered from the Tenant’s perspective are as follows:
1. Ensure your existing lease contains a term allowing a sublet.
2. A Sub Lease cannot be granted for a term exceeding the Head Lease Term.
3. All terms of your Head Lease should be incorporated into the Sub Lease Agreement (most practically, by attaching the Head Lease to the Sub Lease Agreement).
4. Obtain written consent from the Landlord on any Sub Lease Agreement.
5. Approach the deal as if you were the Landlord – particularly with respect to due diligence on the prospective Tenant, security deposits, and monthly payment arrangements.
6. Legal Costs and Real Estate fees will apply.

Landlords typically are not fond of allowing sublet arrangements on their premises, but understand circumstances change and that a Tenant may no longer require premises for which they have an extended lease obligation remaining. Given this reality, the Landlord will ensure that they not only approve of the Sub Lease Agreement itself, but keep the original Tenant clearly in a position of liability with respect to the Sub Lease Agreement.

Tenants looking to sublet may also consider negotiating an early termination settlement with the Landlord to avoid all of the liability issues involved. For instance - if only 2-3 years remain on the term, a termination may be better for both Tenant and Landlord, as such limited lease terms are not as marketable to prospective Tenants. This possibility will be dependent on the strength of your particular market, but certainly worth a discussion.

Again seek out experienced commercial realtors with strong leasing backgrounds, to assist you in working through your sublet requirements and objectives.

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