Is Subleasing An Option For You?
As the world starts to return to work, businesses will be adapting and changing up their workplaces and tenancies. This will see an increase in subletting, or subleasing, arrangements.
Subletting your office or commercial space is a great way to make use of any extra space you have while reducing your overall business costs and boosting your cash flow if you are struggling, which could be the case for many post COVID-19.
Many businesses have already begun to sublease their properties, including Flight Centre.
If you are looking to sublease your space, these are all the tips and traps for you to consider.
Obtain your landlord’s consent
We can’t stress this point enough – you must obtain consent from your landlord before you commence the subleasing process. Check your lease to see if you have the right to sublet, and understand any relating clauses or conditions you may need to satisfy when doing so. For example, your landlord may require you and your subtenant to enter into the deed with the landlord, with your subtenant agreeing not to breach the conditions of the sublease.
Consent also needs to be put in writing and should be considered a formal process with your landlord.
TRAP: Not speaking to your landlord could have serious consequences for your own lease and could prevent them from accepting any subtenants in the future.
Carefully select your subtenant
Selecting your subtenant shouldn’t be taken lightly. You should be conducting a thorough screening process and investigate their financial situation, character and the nature of their business. Ideally, you should be undergoing the same screening process your landlord did with you.
Firstly, you should be engaging with their references, including past landlords and bank and credit references. If they are a start-up business, check their business plan and financial capacity. If they are an established business, it would be worth looking at their previous financial statements.
Beyond their finances and character, you need to decide whether their business aligns with your own and whether their business is consistent with the permitted use of space under your head lease. It’s important you will be able to work cohesively without any issues occurring, especially if you intend to share the premises and work in close proximity. It could also be worth looking into complementary businesses where you will be able to collaborate and support each other for an even greater business outcomes.
If you don’t intend to reconstruct or customise your current space, look for flexible subtenants that can adapt their business to your existing space.
TRAP: Ensure your potential subtenant is stable and will be able to maintain their rental payments. If your subtenant is unable to comply with the financial obligations and they default under the sublease, you will unfortunately be required to pay the full rent amount and will be held responsible for any payment failures.
Determine any preliminary costs
Count the costs. This can include legal, building and compliance costs, along with the cost of meeting local council regulations. To help with this process, it’s recommended you consult with commercial interior experts and property experts who can review your situation.
Decide early on the conditions of your sublease
Key things you need to think about include whether the subtenant will cover any head lease obligations, the terms of the sublease and the rental rate.
Make sure the sublease is consistent with and covers all the rights and obligations under the head lease. Also take note of any provisions which may be different in the sublease from the head lease. One obligation to consider implementing in your sublease is the Make Good obligation.
Consider your own business plan and needs when thinking about how long you want to sublease. You may like to offer a short sublease, which allows for more flexibility but may come with the challenge of finding subtenants. Whatever period you decide, it is best practice that your sublease expires one day before your head lease expires to create a distinction between the two.
When you set a rental rate, take into count running costs, the preliminary costs discussed above, the current market average for similar spaces and inclusions. Remember subletting needs to be financially worthwhile for you.
TRAP: Don’t take advantage of your subtenant and overcharge your rent. Yes, subletting needs to be financially worthwhile for you, but you also need to be fair to your subtenant. If you’re worried about your rental rate, research or seek advice from a property expert.
Ask for a security deposit
You should be requesting a security deposit, especially if this is required under your head lease. A security deposit provides a safety net for you fall back on, especially if your subtenant breaches the sublease.
Put your sublease agreement in writing
You should be documenting all the details of your sublease agreement in specific detail. Make sure this agreement is signed by both you and the subtenant.
Get expert advice on subleasing
A sublease could be a great option, but as you can see there are some complexities.
While the above tips and traps will certainly help you navigate murky waters, partnering up with a tenant representative will ensure you tick every box without the stress and uncertainty.
Team up with one of the experienced and trusted tenant representatives at Broadway Property.
Contact us to discuss your needs. No obligations.
Ben Heritage Managing Director, Broadway Property
Ryan Stewart Director, Broadway Property