C&W Sublease Strategy and Services

SUBLEASING: AN OVERVIEW

There are times in a company’s evolution where subleasing becomes an important tactic in their real estate strategy. When making this decision, there are several considerations worth discussing. Our team is here to help you navigate each of these topics and work towards the best possible outcome. Legal Considerations & Alternate Courses of Action One of the first steps you should take when considering a sublease are the unique terms of your master lease and the potential interest of the landlord to engage in a formal Termination. For the later, absent a pre-negotiated termination right, there are likely to be sizeable fees associated with an early termination, provided the landlord is amendable. That said, a formal termination does offer tangible benefits if achievable and should often be weighed with a formal subleasing strategy. Should a sublease strategy be undertaken, one must pay careful attention to the restrictions imposed by the landlord with regards to consent. To elaborate, some leases prohibit a master tenant from subleasing to tenants that already exist within the project, or whom have corporate financials inferior to that of the maser tenant. Identifying the entities which could present a barrier to landlord approval should be handled proactively. One should also carefully consider the landlord’s right to capture, particularly if your team plans to maintain a presence within the project. Review your sublease language carefully with your team to avoid any surprises. The Economics of Subleasing Developing the right pricing strategy is critical to a successful subleasing effort given the finite period of time in which financial relief can be realized. We must be conscious of competition within the marketplace and therefore a survey of comparable availabilities is critical to planning conservatively. In addition, sublease must consider all-inclusive transactional costs. For example, as a sublessor, will you be absorbing operational costs such as utility or janitorial fees, or will such expenses be passed off directly to the subtenant? What leasing concessions will support the marketability of your sublease, whether that is rental abatement periods or modest tenant Improvements? If tenant improvements are being performed, who is responsible for reinstatement, if required, at the end of the term? The manner by which sublease profits are distributed, if realized, is often documented in the lease. In many markets, the master landlord and master tenant will share in such profits and therefore should be modeled appropriately. Finally, there are administrative steps and processing fees associated to sublease consent, and while these are likely to be minor costs when compared to the overall value of sublease Income received, they should not be forgotten. Further Responsibilities of a Sublessor When transitioning from the role of a tenant to sublessor, you will now become an intermediary between your subtenant and the master landlord. You may be required to field and route building maintenance issues that are the responsibility of building ownership. You will need to develop account receivable protocols and track critical dates. Additional considerations include the security and provisioning of your IT network, use and ownership of in-place furniture, and obligations of all parties to return the premises into an acceptable condition at the end of term. Our team can help you navigate each of these topics.

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