Business, Profits and Strategy

Andrew B. Zezas, SIOR
Relationship Manager,
Strategist, President
(908) 245-5999 x11
andrew.zezas@realstrat.com

Why Your Company Can't Sublease Its Space

10 Fatal Subleasing Errors

So, your company has gone through a process to become more efficient and therefore, more profitable. Management has reviewed operating expenses and occupancy costs, and has determined that because of the efficiencies the company has achieved it no longer needs the amount of space it currently occupies. You decided that the logical course of action would be to dispose of the company's surplus real estate by offering it for sublease to a third party*. So, you interviewed a handful of commercial real estate brokers and hired the right real estate service provider who was most appropriate for the job.

* Although assigning a lease most often can have ramifications that are different than those associated with subleasing space, for the purposes of this article they are considered the same.

Your broker valued your property against market competitors, and began marketing your property to a group of companies most likely to take advantage of the attributes of your space and likely willing to pay your price. Your broker secured a company interested in making a deal, you negotiated terms, presented those terms senior management, received approval, and then submitted your negotiated deal to your landlord. While you're patting yourself on the back for making good business decisions, your broker receives a call from your landlord...and, your deal, your opportunity to recoup your investment, relinquish your on-going financial and lease obligations, and your ability to achieve the efficiency that caused you to start this initiative in the first place, all come crashing down when the landlord rejects your sublease proposal.

Your company took all the right steps a well-managed organization should follow:

You determined that you needed less space
You interviewed a group of real estate experts and engaged the firm that was best qualified for the job
You approved a well-designed targeted marketing campaign
You negotiated aggressively, but fairly
You completed your project in a reasonable time and received approval from senior management
You dotted the "I"s and crossed all of the "T"s before submitting the negotiated transaction to the landlord

So, what went wrong? Did anyone complete a thorough review of the lease, to assess which clauses could pose obstacles to achieving your company's objectives? "Of course we read the lease!" you might say, "And, the lease provides us the right to sublease!"

While your lease may provide your company with the right to sublease or assign, other components of your lease may restrict or void those rights. By the way, in most states when a lease is silent on the issue of subleasing, the tenant usually has a complete and unrestricted right to sublease its space. That's why most savvy landlords include sublease clauses and other clauses...to restrict how tenants might sublease their space. While, on the surface, this may not sound fair, it is a good thing. Consider what would happen to your ability to enjoy the use of your space if the landlord did not control subleasing and the tenant next to your headquarters had unrestricted subleasing rights and subleased its space to a combination dancehall, fish processing facility, and atomic waste disposal facility!

Numerous clauses in landlord-written leases are designed to protect the landlord and other tenants. Many are designed to create hidden obstacles for tenants, and in some cases, additional profit opportunities for landlords. Not aggressively negotiating these clauses can cause fatal subleasing errors. Such clauses and lease content can often include:

Permitted Use
Sublease Signage
Competing with Your Landlord
Offering Terms and Advertising
Minimum Size or Number of Subtenants
Committing to Engage Your Landlord as Your Company’s Sublease Agent
Committing to Engage Your Landlord’s Exclusive Leasing Agent as Your Company’s Sublease Agent
Committing to Hire the Landlord’s Construction Company to Make Modifications to Your Space as Part of a Sublease Transaction
Sharing Sublease Profits with Your Landlord
Landlord’s Right to Terminate or Recapture Your Company’s Lease

Subleasing your company’s excess space, whether in whole or in part, can be an effective means of achieving financial and operating efficiencies. However, in this age of “get-it-done-quicker-than-last-time” too few executives and their real estate brokers focus their energies on completing the initial deal without contemplating the need to provide for a smooth and profitable exit of the real estate in the event circumstances change. Like any good business model, real estate transactions require a defined exit strategy that will support the objectives of the tenant. Regarding subleasing, the value of your company to achieve a successful transaction will largely be determined by the effort put forth when the lease is initially negotiated…not when it’s time to sublease.

So, if you can’t sublease your company’s space, it may be because you have not yet taken the best course of action. Or, it may very well be due to the legacy left to you as the result of a poorly negotiated lease agreement.

Andrew B. Zezas, SIOR, is Relationship Manager, Strategist, and President & CEO of Real Estate Strategies Corporation, Publisher of "Business, Profits and Strategy", a monthly online publication read by thousands of business, financial, and real estate executives nationally, and, is the author of two new real estate books, The CFO's Guide to Understanding Corporate Real Estate Transactions and The CFO's Guide to Hiring the "Right" Real Estate Service Provider, both of which will be available shortly at www.thecfosguide.com.

Mr. Zezas is well-known for his ease and informative style of public speaking, and has given talks, presentations, and has lead educational programs for business, professional, government, and trade associations, including the Building Owners and Managers Association, American Management Association, the U.S. Postal Service, RealComm, Society of Industrial and Office Realtors (SIOR), and others. Andrew is National Chairman of the SIOR Tenant Representation Specialty Practice Board, and is a licensed real estate instructor in Texas and Indiana. He can be reached at 908 245 5999 or via email.

Real Estate Strategies Corporation, located in Kenilworth, New Jersey, and serving clients throughout the country, helps companies create and execute Business DRIVEN Real Estate Solutions...and Opportunities, faster and with less risk. Visit www.realstrat.com.

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