Are you stuck in too much space?

Real Estate Review

As we slowly crawl out of our home offices, remove our masks and return to our shops and workplaces, many of us are trying to decide what to do next. For some, the realization of what worked before isn’t going to work today has led to the question: “What can I do to make this reality better?”

Several clients are into leases with several years remaining, stuck in more space than they currently need, asking what can be done to help them. If your building owner or landlord is in the same boat as you, with a changed landscape and fewer prospects to fill vacancies, they are likely unwilling to just let you walk away from your lease. One of the tools in the commercial agent’s toolbox is a sublease, where a tenant who is leasing space in a building leases all or part of this space to another party, called a sub-tenant. This can give a company breathing room to either ride out an economic dip or reduce the burden of many future years of rent payments when their space requirement has reduced, or their business is in decline.

Subleases happen all the time. For example: Hair salons lease a space in the back of their shop to someone doing facials, waxing or nails. A chiropractor leases rooms in her office to a massage therapist. A physician leases part of his office to an acupuncturist. The optometrist at your local superstore subleases space from the giant retailer who sells you glasses.

Three things to consider before sub-leasing your space:

First: Does your existing lease give you the right to sublease? Many leases prohibit having a tenant sublease without the owner’s approval. This is a common protection built into leases that insures that you are covering any liability issues that might arise from your sub-tenant. For example, the sub-tenant comes into the building after hours and damages the door to your suite, trying to enter because her key didn’t work. The owner will most likely be looking to you to cover the cost of repairs since the owner has a lease with you, not with your sub-tenant.

Second: If you do have the right to sublease (or the owner gives you approval), you may want to screen a sub-tenant the way that you were screened by the owner when you entered into your lease negotiations. It would not be unreasonable to require a sub-tenant to have renter’s insurance which protects you and even the owner from any loss or liability. Do you have valuable equipment or products in your space that a sub-tenant and his clients will be walking through to get to the subleased space? Depending on your type of business, you may want a separate entrance or somehow secure your part of the business from your sub-tenant. If this involves construction, once again, you may need to get your owner’s approval. She may want you to remove those improvements at the end of the lease at your cost and expense.

Third: What is the minimum/maximum amount of time you are willing to lease? The tendency for a business trying to mitigate paying too much rent is to lease the space for the remainder of the current term. A lease is a legal document, and there are certain rights that are understood and guaranteed your sub-tenant when you agree to lease. You cannot simply cancel one because you decide you don’t like how your sub-tenant dresses, or what type of music is being played. Not having a complementary work environment can be a huge problem. Imagine having a high-impact aerobics class blaring loud music with a dozen people singing along in the back space from a yoga studio; perhaps not a good fit. Of great importance is having the ability to grow back into your space if your business returns.

The good news is that there are many tenants in the market seeking small spaces with lots of flexibility. Having a space to lease for one to six months at a time is a positive for them; and frequently they are willing to pay a little more for that opportunity.

There are several more considerations, including how utilities are split, who handles janitorial service and more. Drafting a reasonable lease that protects you and your business — and is a legally correct document — is paramount. A commercial real estate agent who is accustom to representing landlords is well equipped to handle these concerns, as these same priorities must be addressed when handling space directly for the owner.

If you are stuck in a lease with too much space, meet with a commercial agent to see if subleasing your space can be your salvation. Similarly, if you own your building and are not in a position to sell, finding a tenant to lease part of your building could be a viable solution.

About Michael Shapiro 7 Articles
Michael Shapiro is director of commercial sales and leasing for Drucker + Falk, a Newport News company for 80 years with more than 3,000,000 square feet of commercial space and more than 34,000 apartment units in nine states under leasing and management.

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