Office Sublease Strategies

The current economic downturn is creating opportunities for businesses to reduce operating costs through lower facility rental cost. This is true of not only tenants seeking entirely new space, but is also having a beneficial impact on businesses lowering the cost of existing facilities by negotiation of early lease renewals, which I recently addressed in this blog.

Not only are rents dropping for space being offered for lease on a direct basis but as a result of corporate downsizing, the postponement of expansion plans and complete operational shutdowns, the market for sublease space is presenting additional discounts to opportunistic tenants.

Since a sublease often originates from a tenant's financial hardship, it's critical that prospective subtenants understand the risks accompanying sublease scenarios. Typically, when tenants sublease space to other businesses and then subsequently default on their lease obligations with the actual building landlords, subtenants can lose possession of the space and find themselves without rights that were afforded to them by the sublease agreement. This can be particularly problematic if you have invested significant improvement dollars into your space or otherwise cannot afford, financially and operationally, to vacate your building on short notice. Despite the soft market, you could find yourself negotiating with little to no leverage.


One way to avoid this risk is to negotiate the tenant's buy-out of the direct lease and simultaneously negotiate a new direct lease between you and the actual building landlord. Typically, the tenant would pay a lump sum fee to the prime landlord in return for cancelling their lease. These dollars, in turn, could be used to "buy-down" the direct lease rate, giving you the financial benefit of a sublease while avoiding the risk of default by the sublandlord.


But remember, this strategy may not be possible due to the fact that financially distressed sublandlords may not have the cash to fund an adequately sized lease buy-out. In my next blog I’ll discuss a "non-disturbance" clause that can be a valuable tool in the negotiation of subleases to your lease negotiations.