Subleasing: Issues to Consider When Subleasing Part of Your Leased Space

In today’s challenging economy, a commercial tenant may want to lease out portion of its space to another company. Sharing your leased space brings in some income to offset the rent and also utilizes space that otherwise would be unused or underutilized.  However, before signing that sublease agreement, consider the following:

·         Does your lease permit subleases? If the property owner is an affiliate of the tenant, this becomes a nonissue. However, when the landlord is an unrelated third party, the lease agreement often will not permit subleasing or will require landlord’s prior written consent. The landlord’s concerns will have to be addressed in order to obtain its consent.  Give yourself enough time to obtain the consent, keeping in mind that the landlord may not see the same urgency that you do.

·         Does your financing permit entry into material agreements, such as a sublease, without lender notice or consent? Depending on what percentage of the property will be subleased, it may or may not be material.  If you have secured financing, such as a line of credit or a term loan, the loan agreement will contain covenants limiting what you as the borrower can and cannot do without a waiver or consent from the lender.  Check your loan documents and confirm that lender consent won’t be required first. If consent is needed, reach out to your contact at the lender earlier rather than later. Allow time for that approval process to be completed.

·          Can you clearly identify the space to be subleased? The subleased space should identify, with a drawing if possible, what area of the premises will be occupied by the subtenant. Again, the lender won’t be feeling the same urgency to complete the process as you are.

·         Do the terms of the sublease conform to and otherwise work with the terms of your lease? Any sublease will reference the lease and provide that it is subject to the terms of the lease. However, sublease terms should also dovetail with what you will have to meet in your lease. Consider the timing of your rent payments and notice requirements, etc. and set the time frames in your sublease to accordingly. If you have 10 days to notify the landlord of an issue, you don’t want the subtenant notifying you in 15 days.

·         Will there be shared portions of the building or premises? If the subtenant’s employees will be sharing your parking lot or using your truck docks, then think through the practical issues that might arise by the shared use, potential liabilities, privacy concerns, timing of shipments to be unloaded if the docks are full. Also, what about shared utilities, payment for snow plowing and lawn care, etc.  Will you share the costs or will you incorporate a percentage of the estimated costs into the sublease rent? Once you’re identified the potential issues that could be caused by your shared usage of certain facilities, then craft functional solutions that ensure, as much as possible, a peaceful existence in the shared facility.

·         Based on the subtenant’s intended use of the subleased premises, what liability issues could arise? Employee interactions/disputes, privacy of your respective client/customer information, damage to property of the businesses and/or employees, and lawsuits filed by invitees of the subtenant are just a few of the potential issues. Indemnification provisions will be a necessity. Also, some of the risks of sharing space will affect both parties, so the indemnification provisions may need to be mutual.

·         How will this affect your insurance?  Talk to your insurance agent and make sure you know exactly where you will and will not be covered. Require the subtenant to obtain appropriate coverage for its subleased premises naming you as a named insured. Depending on the structure of the sublease, you may need to name the subtenant as a named insured. Cost out how this affects your insurance premiums and work any extra costs into the rent amount.

·         Under what circumstances might you want to terminate the arrangement?  Any time you are entering into an agreement, and a sublease is no exception, be thinking of your ‘outs’. Address the circumstances in which you or the other party would have a right to terminate the sublease and don’t leave out any remedies you might want at your disposal if a problem does arise.

While this list is not exhaustive, it is help get you on the right track to negotiating a workable sublease arrangement.