7 Important Factors to Keep in Mind when Subleasing Office Space
Subleasing office space from another tenant can present a very exciting opportunity for a business in NYC. Many times, a tenant will sublease a portion of their space, and in doing so, asking rents can be significantly lower than the standard market rate for ‘direct’ space in the same building.
However, there are a number of things to watch out for when considering a sublease:
Arranged Occupancy - Subleased space is often only available under ‘arranged occupancy.’ This means that there are a number of things that need to be completed before a prospective tenant can actually occupy the space in question. In the case where the overtenant is moving out from most or all of the space, they have to secure a new location before you can actually sign the sublease and move your business in. This can have a very negative impact on your business operations if delays result from this search.
Lack of Lease Flexibility - Because you are subletting space, you automatically inherit the overtenant’s lease, or the ‘overlease.’ This results in a lack of flexibility for the subtenant to negotiate various items on the lease. One of these may be the right for the subtenant to sublet themselves. This can sometimes come very much in handy, so you should do an assessment beforehand if this is something that is important to you.
Layout and Modification - Another potential constraint in a sublease is the fact that in most cases, the space is delivered in the existing layout of the overtenant. Modifications to this layout are generally more limited, certainly if they will require any 'building out' by the landlord themselves. External factors aside, in most cases, the landlord will not agree to modify the space, and it will be up to the overtenant to make any desired changes out of pocket. So if you're a law firm looking for partner offices and a conference room, subleasing from a tech company that has an open layout may not be a great idea if major modification will be needed. Nevertheless, if the existing layout does work for you, the ability to execute a deal quickly and make the move smoothly becomes significantly easier and cost-effective over leasing 'direct', non-built space.
Risk of Default - The financial state of your sublandlord will have a great impact on your business. If they go into default, as a subtenant you have no (or limited) right to attorn, and you may lose the space in the interim.
Holdover Clause - In many cases, subleases are part of a larger portion of space. If a holdover clause exists on the larger part of the space, it automatically transfers over to your portion as well. This can prove to be a liability. Basically, a holdover provision states that should the tenant remain in a space after the lease expires, the landlord has the right to demand various costly penalties. Not fun stuff.
Drop Dead - Every tenant must get consent from their landlord before subleasing their space. This process can take a long time and it is critical that you bring this up early on in considering subleased space. You must request a Drop Dead Date, beyond which you have the right to cancel the lease at your will. Typically, the standard for this period is 30 days from the execution of the lease. Your broker should try to negotiate down anything over 30 days.
Timing - Subleases tend to be for shorter terms, because they are usually connected to the expiration date of the overlease. In some cases, your broker may be able to negotiate a 'direct extension' to remain in the space after the overtenant's lease expiration - but this isn't always possible. If you are looking for something closer to 10 years, or as a main office/headquarters, a sublease may not be the best option for you. You will likely want something with more flexibility and stability to work with.
These are a few considerations invovled in subleasing - there are certainly more.
Overall, what you can lose in terms of flexibility and negotiating leverage with the landlord, may not be worth the cheaper price-tag. However, if done correctly and carefully, and if you work through a tenant-broker to guide you through these considerations, subleasing can present the perfect opportunity to secure a great space for a shorter period of time, for a project you have in the area, or whatever it may be - and, oftentimes, at a considerable discount.
If you have any questions regarding subleasing, or anything else office-leasing related - please do not hesitate to reach out.