If you are relocating and can’t get out of your lease or have downsized because of the economy and want to defray some of the rent, consider subleasing to another business. This can help tremendously with your cash flow.
1. Determine if you are permitted to sublet
Check your lease to make sure you are permitted to sublet. A specific sublease clause may limit the amount of space you are permitted to sublet, such as 25 percent. If you sublet more space than you are allowed to, the landlord usually has a “right of recapture” to take back your unused space and lease it out directly. Whether the landlord exercises the right depends on the commercial realty market. According to Cushman & Wakefield, office vacancy rates in major markets have declined by 71 percent since 2007. You’ll need to check with your landlord about intentions to recapture space you no longer want.
If you are trying to get out of your entire space because you have decided you (and any employees) can work from home and drastically cut overhead, are simply relocating, or going out of business, again, you may or may not be able to do so. If the landlord has the right of recapture and is willing to exercise the right, it may be better to let this happen so that you avoid the obligation of staying on top of collecting rent from the subtenant. However, in a tough market, you may be paying the landlord more than could be charged for re-leasing the space, so you’ll be stuck for the time being.
2. Decide what to charge
Typically, you can't expect to receive the same amount of rent you’re paying for the space because subtenants are looking for bargains. However, in markets where commercial space is at a premium and you’re in a position to charge more than your actual rent, you may have to split any profits with the landlord.
Check your lease to see whether there is such a provision to split rents from a subtenant exceeding your rental amount and what the split is (such as 50-50). Look to see whether the split is net of any expenses, such as advertising, commissions and legal fees, which you’ll probably incur to find a subtenant.
3. Finalize the arrangement
Depending on the amount or type of space you’re subleasing, you may be required to make some structural changes to your space to accommodate a subtenant. For example, if you have a suite of offices and want to sublet one of them, you may have to put up a barrier and give that office access to a hallway. Any changes you make must, of course, conform to the building code.
You also need to make a contract with the subtenant for the space. The contract may be a sublease for a percentage of your space. Alternatively, you may contract to allow another business to use a desk within your office. This is called a “desk-sharing arrangement.” Be sure your agreement spells out what services and access this subtenant may be entitled to, such as use of the receptionist, a kitchen area, and the photocopier.
Don’t try to write a sublease yourself. Work with a real estate agent who can make sure the agreement conforms to your existing lease and protects your interests.
If you want to learn more about becoming a subtenant, see last week's, What To Know About Subleasing Office Space.