What is subletting (subleasing)?

Ok, so you’re thinking about subletting your office space or you’re considering taking a sublease from an existing tenant.

Well, subject to your lease, subletting enables a business to let out part of their existing property to another business. This means the original tenant’s rent commitment to the head landlord would remain the same, however, the original tenant would then receive rent from the subtenant. Subletting, therefore, is a simple way for your business to reduce rent expenditure without having to relocate.

Why do businesses consider subletting their office space?

After salaries, rent is often a business’ largest expense, but there are a number of other reasons why businesses turn to subletting as a viable option. Some of the more common examples since the Covid-19 outbreak have been:

1. A change in business strategy or forecasted growth

2. The successful adoption of hybrid and flexible working has created surplus “grey” space.

3. A need to generate additional revenue in the short term while assessing the impact of Covid-19 on future growth plans.

Is subletting the best option for your business?

The truth is there is no right or wrong answer, it all depends on your business needs at the time of asking. The first thing you should do, however, is to seek legal advice before agreeing to sublease. The terms of the head lease must be read thoroughly before your business decides to sublet, to ensure you’re not prohibited and that you have the landlord’s consent.

Additionally, you may require further protection should the subtenant cause any damage, for example, as the repairs and maintenance obligation under the head lease may still apply to the entire property.

You should also check if your existing lease agreement has a pending break clause. Subject to its timing, a break clause could provide your business with the flexibility to terminate your lease early by allowing you to take advantage of a smaller office more aligned with your future needs.

If your business can no longer sustain the rent liabilities, surrendering your lease would allow you to bring your lease to an early end. If, however, your lease agreement has the option for an assignment, this may be a more convenient way to transfer your existing lease to a new tenant.

In summary, these are our Top Three Pros and Cons for subletting your office space.

Pros:

1. Additional revenue.

2. If you are sharing the same physical space, you can benefit from shared customers, resources, networking, workplace diversity.

3. Agreements are often more straightforward than other complicated commercial leases and can be easier for you to manage.

Cons:

1. An undesirable subtenant causing damage, nuisance or resulting in unpaid rent.

2. The capital investment required to market your grey space.

3. If you’re the subletting tenant, you may have the equivalent of a ‘live-in landlord’ and that can sometimes feel intrusive.