Moving office, relocating your business, wishing to downsize or looking for better premises?
Subleasing is an increasingly popular strategy, especially in the current climate where workplaces are changing and businesses are adapting to the “new normal”.
It’s an excellent way for startups and other businesses to get their foot in the door on expensive or desirable real estate, without being locked into long-term commitments. Commercial spaces are often in high demand, but the realities of economic conditions or a business's growth needs may make it ideal to consider this option.
At LPC we are currently focused on the theme of RESET - evaluating and resetting property strategies - which is particularly pertinent at this time of the year and as we look to a new post-pandemic future. In this article we will at the benefits and pitfalls of taking out a sublease as part of a reset strategy.
What is subleasing?
A practice in which an existing tenant rents out part of their space to a third party for a portion of time within their existing lease contract. Of course this is only if this is allowed for in the terms of the original lease or separately agreed with the landlord. The primary tenant remains legally responsible for all obligations stated in the lease agreement, such as regular payment of rent.
Advantages of Subleasing
The benefits of commercial subleasing are numerous, especially in the current climate, where many businesses are in financial stress or looking to smaller premises with a change in the working environment (such as more staff working from home).
Reduced rent for a better property
Probably the number one reason most people consider the option. Subleasing can help business owners subsidise the cost of high commercial rents, but for the tenants, the benefits of being able to lease a smaller space at a reduced rental are obvious. It’s a win-win arrangement.
“With businesses changing the way they work, we’re seeing a strong uptake in properties available for sublease. This allows organisations who were previously unable to lease space due to lack of availability, high rental rates or other factore, to take advantage as they reset their property strategy for the future”. - Dylan O’Donell - Director/Managing Director for Victoria
Flexible and straightforward
Subleases are often flexible and uncomplicated, allowing you to commit to lesser timeframes. This helps greatly if you’re a business in growth phase and unsure of exact needs in a year or two. Subleases rarely have all the restrictions and responsibilities of the primary lease, which means less to worry about.
Business networking
Shared space can lead to excellent networking and referral opportunities, especially if you sublet from an aligned but non-competitive business (eg a law firm and accounting practice sharing space).
Access to amenities without breaking the bank
One of the best parts about subleasing is that you have the opportunity to negotiate shared amenities and facilities with your sublessor. In addition to paying a smaller rent price, you can also save money on other costs, like utilities.
The sublessor will also likely have access to shared office equipment like photocopiers and meeting rooms available at a reduced cost or even for free. Many subleased properties also have access to shared amenities such as bathrooms and storage rooms.
No hidden charges
Most subleases include all the services of a typical lease, including flat monthly payments. As the sublessee, you will be responsible for any damages you cause. However, your sublessor and the landlord will be responsible for other building costs, such as repairing and maintaining common areas.
Cons of Subleasing
Before you sign a sublease, be sure to carefully examine each clause to avoid any legal loopholes down the line. Here's what to watch out for when considering subleasing:
Sublessor Contract Default
When entering into a sublease, you should consider the possibility of your sublessor defaulting on the original lease. Should this happen, you may lose immediate access to the premises. The best way to mitigate this is within the lease - include your rights to recover costs and damages if a sublessor defaults. Be sure to understand your when your sublessor defaults on their contract.
“It’s important to have your sublease thoroughly vetted by a professional who can guide you on your limitations, rights and obligations” - Gillian Heath - Associate Director, LPC Sydney
Unfair agreements may be transferred
If the sublessor negotiated a bad deal with the landlord, they might pass other fees and higher rent along to you. You should have access to both the sublease and the original lease contracts for professional review.
Unclear space alteration approvals
Businesses with specific requirements on how their space is set up, such as lighting, layout, or signage requirements, may find it’s not possible with a sublease. Sublessors often have veto power over changes. It's therefore imperative that you include clauses regarding space usage and alteration in your lease.
In addition, any maintenance required on your subleased space that requires your landlord's attention will have to go through your sublessor.
Before locking in an agreement, negotiate any needed alterations in your space, as well as possible future requirements.
It’s not your space
Ultimately, subleased spaces are often not private and may be shared with another business' signage, advertising and staff. This can create a "small business" feel when your clients visit, which may or may not be important for your brand image.
In closing,
“Subleasing is a property strategy that can greatly benefit a business requiring flexibility and financial control,” says Adrian Gerber, Director LPC Victoria. “With more opportunities opening up in the market across Australia, now is a good time to evaluate how it could benefit your business”.
Why LPC?
At LPC, we partner with tenants and occupiers across Australia and New Zealand to optimise their office, industrial and retail property portfolios providing an integrated suite of services including transaction management, portfolio and lease management and project management. We provide conflict-free advice and representation, meaning we have no ties with owner-developers or landlords. Tenants and occupiers interests remain at the core of what we do as we negotiate on your behalf and endeavour to rebalance the scales in a market which favours landlords.
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