Although a tenant may enter into a lease agreement never intending to exercise its right to sublease the space, it is a common occurrence in the office leasing world, and a need that often comes as an unpleasant surprise. As a continuation of our series on negotiating office leases, my partner Jim Vanderslice and I will uncover some of the traps in sublease language.
The basic tenements of the sublease paragraph say the tenant may not sublease any of their space without the consent of the landlord. This usually comes with a long list of specific requirements and restrictions, but it is important for a tenant to understand how the provisions can impact their business. A tenant can work with the landlord to find wording that gives the landlord comfort while also providing the tenant flexibility.
The landlord is concerned with how a subtenant can negatively impact their property, so it is reasonable that their consent should be required, but not unreasonably withheld. Look for absolute statements that give the landlord sole discretion to make decisions about who you can select as your subtenant, and negotiate a better solution that keeps your options open. Financially, the subtenant should meet reasonable qualifications, but they may not need to have financials as strong as your company. Remember, you are still on the master lease and your sublease document will be subordinate to that agreement. Your overall responsibility doesn’t go away just because you sublease the space. You are still on the hook.
Traditionally, subleases in the DFW market are priced 50 percent below current market rates in order to entice someone to take your space, which comes with time limitations and often no improvement allowance. Look at the sublease language and make sure that the landlord does not have an exorbitant fee structure to pay for the review of a sublease document. Additionally, if you do happen to lease the space for a rate higher than market, try to keep your profit rather than sending it to the landlord. If overage is due, always recover your marketing and commission fees before any profit sharing begins.
Finally, make sure you address the timing of the landlord’s approval and consent. Time can kill a deal, so you need the landlord to respond back to you as quickly as possible.
Every lease has its own unique wording, and each landlord/tenant will have specific requirements for sublease language. But the sublease paragraph should be taken seriously. The financial impact for both parties can be enormous if not contemplated during the lease negotiation process.
Will Sale is a vice president at CNL Commercial. Contact him at firstname.lastname@example.org.