The Pros And Cons Of Commercial Subleasing (+ VIDEO)
In his video, Tim touched on some of the benefits of commercial subleasing. We delve a little deeper into the topic to ensure you make the most out of your next subleasing opportunity.
What is commercial subleasing?
A commercial sublease is a stand-alone agreement between a tenant who already holds a lease to a commercial property (sublessor) and another party who wants to occupy part or all of that commercial property (sublessee).
There are a few reasons why a business may choose to sublet their premises including to reduce cost, optimise space or as part of a downsizing strategy.
The advantages of commercial subleasing
There are many benefits that come with commercial subleasing. Here are just a few…
- Lower cost
One of the biggest benefits to commercial subleasing is the cost.
The rent attached to subleases is almost always substantially less than a direct lease. If your business only requires a small amount of space, it can be difficult to find a property at a reasonable price. With commercial subleasing, you have a better chance of only paying for what you need.
What’s more, most subleased spaces come fully fitted out, so you will not have to worry about upgrades and fit-outs.
Whether you are liable for the cost of ‘making good’ at the end of the term will come down to negotiation. Some subleasing agreements will require you to make good as per the obligations of the overarching lease. This is because the sublessor will argue that they no longer have direct control over the space that you are subletting.
In Australia, a landlord will generally expect you to commit to a minimum term of three years with the option to extend.
Most subleases, on the other hand, tend to be within the six to 24-month range, so they are great for businesses that are looking for short lease terms. This is because the sublessor will already be part way through their lease. So, your sublease may only be for the remaining portion.
Subleasing also keeps things flexible for companies in volatile industries, who may have to upsize or downsize at the drop of a hat.
- Networking opportunities
Subleasing part of a commercial space with a complimentary business can create opportunities to network, generate new ideas and grow your referral base with other similar but non-competing companies.
The ideal situation is to sublease from a company who works in the same industry but provides different services. This greatly increases the opportunities for cross-promotion and share referrals. What’s more, subleased space is not private space, which means you’ll be in an environment with another business’ signage and advertising. So, teaming up with similar professions might disseminate that ‘small business’ feel when your clients visit.
- Fewer strings attached
Subleases are far less complicated than other types of commercial leases. However, it’s important to note that a sublease is a legally binding contract that is based on the original lease. So, ensure you carefully review the terms of both the sublease and the original lease to minimise your risks.
It’s best to consult a tenant representation specialist or lawyer before signing, and stay wary of sublessors who refuse to show you their original leasing documents.
- Shared amenities and facilities
Subleased spaces are usually part of larger areas, so you may not have to pay for (or may share the cost of) things like internet, air-conditioning and alarms. You may also be able to negotiate access to the sublessor’s photocopying machines or other office equipment, which means less for you to purchase.
Many subleased properties also provide access to shared areas such as bathrooms, storage rooms, meeting rooms etc. at a reduced cost or, if you’re lucky, free of charge!
- No unpredictable costs
Subleases are usually fully-serviced leases with flat payments and no unpredictable outgoings.
Of course, as the sublessee, you will be responsible for the cost of any damages you cause. However, your sublessor and the landlord will be responsible for other building costs, such as repairing and maintaining common areas.
The cons of subleasing
There aren’t too many risks when it comes to commercial subleasing. But, as with everything, there are some. If you’re considering a commercial sublease, keep the following things in mind.
- Risk of sublessor default
Perhaps the most significant risk that you need to consider is the chance of your sublessor defaulting or breaching the terms of the original lease. If this happens, it will most certainly affect your lease as well.
You can mitigate your risks by ensuring your sublease terms include the rights to recover costs and damages. Be sure to understand your rights and obligations when it comes to sublessor default, and make sure you’re protected before you sign on the dotted line.
- Unfavourable lease terms
If the sublessor has negotiated less than favourable terms with their landlord, they may try and pass these on to you. So, be sure to ask to see their original contract, and do your research by comparing your terms to other properties on the market.
This is another situation where tenant representation and/or legal advice can go a long way.
- Less flexibility to customise
Often, subleasing means that you share a space with an existing tenant. This can help reduce costs because the fit out is already done, but may mean you have less room to move when it comes to personalising your space to suit your brand and business needs.
If you have very specific requirements for how you need your space set up, you may need to consider your own commercial lease. Another way to avoid problems is to seek very clear agreement from your sublessor regarding the control you have over the space. Keep in mind that you may also need approval from the building owner (on top of your sublessor) to make changes.
- Maintenance Delays
If you require landlord maintenance and repairs, you may have to raise the alert through your sublessor, which can cause delays and headaches.