Subleasing can seem a quick and simple way to find office space, or defray the cost of unused areas. But as property expert Nita Arora-Parkes explains, subleasing can also be frustratingly inflexible for landlord and lessee alike.
The alternative to directly leasing office space is subleasing. Subleasing office space has become increasingly popular to small businesses as well as factors such as company restructuring and downsizing where subleasing is an attractive alternative to writing off the costs of vacant space. However subleasing can become more complicated than direct leasing.
There are advantages and disadvantages of subleasing, and in addition to the 13 items following, the decision can be contingent on other factors such as:
- The availability of sublease space or direct office space in the area that you are looking in.
- The lease terms and conditions.
- Whether you are looking for a short or long term lease.
- How much each lease arrangement will end up costing you.
The following are 13 Pros and Cautions to consider when subleasing an office space:
- More affordable and easier to start small: Subleased spaces are usually more affordable; if your business is small and you only need a few square meters, you may find more options in the subleasing markets.
- Sharing facilities and services: Some subleased spaces provide access to common areas e.g. reception areas, kitchens, conference rooms, and storage, at a reduced cost or even for free. You may be able to negotiate leases that allow you to share the sub-lessor’s fax, printer and photocopying machines; and you may not have to pay for alarm systems or Internet access if already equipped.
- First option to take entire space: If the sub-lessor wants to move before their lease is up, or if the lease has expired, you may get first option to sublease the entire space. Then you may be in a better position to negotiate your own lease and terms with the landlord directly.
- Easier to budget: Usually subleases are fully serviced leases with a flat monthly rent. This can make budgeting for rent payments easier, as there are no unexpected additional fees.
- Sole traders working as a team: Sole traders may benefit from subleasing space if sharing with a complementary or similar business. This could result in networking and client referrals for both parties.
- Subjected to the remaining lease term: When direct leasing from a landlord you can negotiate a long term lease with options to extend. However with a sublease you are limited to the remainder of the sub-lessor’s term. This can reduce the value of the lease, but provides a good negotiating point for you, and if you are looking for a short term lease this can be a bonus. Sometimes the landlord is willing to sign an additional new lease directly with you or to sign a new lease beginning at the expiration of the sub-lessor’s lease. If you need to negotiate at the end of the initial term you may face a price jump if the market rate has increased.
- Sub-lessor breaches lease: If your sub-lessor goes into liquidation, defaults on payments or breaches their lease, it will affect your sublease as well. You need to address this in your sublease to protect your rights and business in recovering costs and damages if you are evicted because of the sub-lessor.
- Delays in maintenance and repairs: If you need repairs or require additional services provided by the landlord, you will most probably need to go through the sub-lessor to action. This may cause delays and impact your business adversely.
- Image and brand: Subleasing means that you could be limited in how you present your business, including the exterior and interior signs, advertising, and decor. It can help to sublease from someone in a similar type of business or with a similar image.
- Paying higher rent: Some sub-lessor’s sublease their office space in the hope of making a profit. This is disadvantageous for you if you are paying higher rent than your sub-lessor. Make sure you shop around, never accept a first offer, and always negotiate.
- Agreeing to the terms and conditions in the primary lease: If the sub-lessor negotiated an unfavourable deal with their landlord, they may try to pass on certain fees and higher rent to you. Be sure to read both the sublease and original lease and compare your sublease terms to as many other comparable rents and offers in similar spaces as possible. You may also be limited in how you can use the property.
Although some aspects of the primary lease will not apply to you in your position as a Sub-lessee, some clauses will still apply, e.g. general building rules. To minimise your risks, make sure you have a legal entity review your sublease as well as the original lease before signing anything.
- Sub-lessor’s Business: When subleasing, be sure to do your homework on what business your sub-lessor is conducting. It may conflict with your business or ethics or it may be extremely noisy. Also be aware of any legal disadvantages if you do have problems with either the sub-lessor or the landlord.
- You, the Sub-lessor and the Landlord: Finally, even though the transaction is with the current tenant of the office space, it is not necessarily two party negotiation, but potentially a three-way negotiation between landlord the tenant and the sub-lessee.
The landlord’s consent is required for most subleases, and the lease between the current tenant and landlord must allow such an arrangement to be entered into. If the landlord does agree, you may find that there are certain obligations owed not only to the sub-lessor but also to the landlord.
Subleasing can be a great way to obtain short-term office space at a lower market rate, however make sure you review both subleasing and direct office lease opportunities and carefully review both the sublease and the sub-lessor’s original lease and understand your obligations. It is imperative that you seek legal advice before signing anything as subleases are legal binding agreements and are also dependent on the original lease.
Analysis: The misnomer of bank regulation and loan costs
By Adam Zuchetti
Analysis: Bank ‘misconduct’ a woeful understatement
By Adam Zuchetti
Analysis: Banks wrongly targeted as business custodians
By Adam Zuchetti