Posted by Ten Fong in Negotiating
Should I Consider Sublets?
There are some real benefits to sublets:
- Build Out. Since there is already a tenant occupying the space, the premises has already been built out, so this saves money, time and energy compared to the alterative space options that require construction of leasehold improvements. Building space from scratch can cost in the range of RM50 per square foot these days, so taking over a lease that is already fully built out can be a real meaningful savings, and you can turn your fixturing period into free rent.
- Term. Most landlords require 5 or 10 year lease terms. Sublets go for however long the sublandlord’s term goes for. So if you want a shorter term than 5 years sublets are a great way to go. Consider sublets that have a lease term left that you are comfortable with.
- Discounted Rent. Most sublets trade at a reduced net rental rate compared to direct space through landlords for a couple of reasons. Firstly, most tenants that are looking to sublet their space are in more of a rush to successfully sublease their premises compared to patient landlords that are in the landlording business. Secondly, there is less demand for subleases since the terms are typically shorter than 5 years. When most businesses relocate they want to sign a lease for a long time so they don’t have to go through the pain of negotiating and moving again soon, and they usually have significant leasehold costs they want to amortize over as many years as possible. With less demand comes lower prices.
- Furniture. Whether a company is subletting to move to a larger premises or downsizing, most often some or all of the furniture is usually available for sale. It is normally sold at a heavy discount as the sublandlord does not want to bother with moving or disposing of the furniture and the most convenient purchaser is the tenant subleasing the space. So consider sublets as an opportunity to furniture shop for your business as well.
- No lease to negotiate. The existing tenant’s lease must be inherited by you. The head landlord is already receiving their rent from the existing tenant and they already have a negotiated the lease. The landlord has no interest in renegotiating anything to suit your needs so you need to just accept the lease as it is. Which means that you don’t need to worry about negotiating the lease the deal is simple. You will still want to have an expert lease review company take a look at the lease however.
While you should include sublets on list of spaces to consider, finding a great sublet is usually more luck than skill, since they normally do not account for any more than 10% of the total available space in the market.
There are also some disadvantages to sublets:
- Risk of Sublandlord Default. You rent the premises from the sublandlord, and your sublandlord rents it from the head landlord. But you do not have a contract with the head landlord. So if your sublandlord goes out of business, you are in the space without a lease. Laws can vary by jurisdiction, but as a general rule you now just have to figure out the new rules of the game with the landlord. What normally happens is that the landlord is entitled to charge the fair market value for the space. Since you are probably in the sublet on a nice discount, this could mean that there will be a substantial rent increase coming your way. So make sure you evaluate the financial strength of the sublandlord.
- Having two landlords. Let’s say you want to make some changes to the premises ? you have to receive the approval of the sublandlord and then the head landlord. This isn’t always a major issue since the ideal situation is that you have taken the sublet as-is and are using the existing leaseholds as they are, but if you need to make any alterations, you are not just dealing with one party.
- Non-assignable benefits. Usually it specifically states that some perks are not transferrable to subtenants. For example, a right to renew, or building signage rights. While you do not have to negotiate a lease and are inheriting what the sublandlord agreed to, you need to be mindful of whatever rights that are not passed along.
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