As businesses plan for the coming year, some may find they are leasing more space than they truly need, and might be looking for a subtenant to “chip in” to help defray rental costs. Others might find they have outgrown their current spaces or have different space needs than when the lease was originally signed. In either event, entering into a sublease arrangement might be a sensible idea.
The following is a five-step plan of attack, along with guiding principles for businesses looking to accomplish a sublease, accounting for practical considerations as well as the provisions of the governing lease agreement.
1. Review your lease: The first step in considering whether or not to enter into a sublease is to take a careful look at the sublease and assignment provisions in your existing lease. Many leases impose restrictions on a tenant’s ability to sublease its space. In some instances, landlord consent will be required in connection with any sublease, whereas other leases will carve out certain circumstances in which landlord consent is not required (e.g., for a sublease of space to an affiliate of the tenant).
Similarly, while some leases specify that landlords must be reasonable in considering whether or not to grant such a request, other leases give landlords broad discretion to withhold consent to a sublease for any reason. In any event, you must understand the ground rules before going any further.
2. Talk to your landlord: When considering a sublease, transparency is often your friend. Tell your landlord how your space needs have changed since you signed your lease. You may be surprised to hear that your landlord is interested in taking back all or a portion of your space so that they can undertake renovations or bring in a new tenant they have prospected, in which case you may not need to pursue a sublease.
Even if your landlord is not interested in taking any space back, approaching them early on with a clear understanding of the restrictions in the existing lease will foster a spirit of good faith and cooperation, which will serve you well should you ultimately need to obtain their consent.
3. Identify a potential subtenant and establish key business terms: Once you’ve spoken with your landlord and you are certain that you will be pursuing a sublease, the next step is to sketch out the key business terms of a sublease arrangement (rent, term, etc.) and identify a potential subtenant. It is critical to do your due diligence at this stage.
Your lease may specify that a subtenant must meet certain criteria related to financial strength and reputation. It may even specify that any subtenant must operate the same use permitted under your lease. A potential subtenant’s financial strength is of critical importance not only for the landlord, but also for the tenant seeking to sublease its space, since many landlords will require that the original tenant remain liable for its obligations under the lease, even if they are breached by the subtenant.
Finally, when considering the amount of sublease rent you will charge a prospective subtenant, be sure to check your existing lease to determine whether you will be required to share any excess sublease rent with your landlord.
4. Obtain landlord consent if necessary: Once you have done your research and identified a potential subtenant, present as complete a package as possible to your landlord. This will help to streamline the consent process. At this point, you may also wish to ask your landlord to confirm that the consent of its lender (if any) is not required.
If you have not already spoken with a lawyer about your desire to sublease some or all of your existing space, this would be a good time to get one involved so that he or she can help facilitate the consent process.
5. Draft a sublease agreement: Once your landlord has given its consent to a proposed sublease, you can begin to draft and negotiate a sublease agreement. Remember that your landlord may ultimately have the right to review and sign off on this agreement.
In addition, be aware that your subtenant may request a recognition agreement from your landlord to protect its interest in the space (this may require providing the subtenant with a copy of your lease, so consider redacting sensitive terms, like rental figures). Your lawyer will be able to facilitate the drafting and negotiation of these documents.
Depending on the particular provisions of your lease, the steps may vary slightly. Nevertheless, they should help you formulate an efficient plan of attack for what may otherwise appear to be a daunting task.
Erin M. Vanden Borre is an associate in Hinckley Allen’s Real Estate practice in Concord, NH.
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