The 3 Drawbacks of Subleasing an Office
It’s easy to see why business owners, especially those with newer businesses, are drawn to subleases. Perhaps you’re a new venture looking for an office for just a year or two while you continue to build your company. Maybe you can only afford space on the outskirts of town, but plan, in less than a year, for enough cash flow to secure a trendier outpost in the heart of the city.
All these things may make subleasing attractive: Most tenants view subleases as underpriced when compared to the traditional market. They also consider a shorter-term lease beneficial for business growth. Yet, subleasing may not necessarily be the boon it appears to be.
Subleases aren’t always the best option, and tenants need to understand why. Here are some of those negative aspects:
One of the key draws to a sublease is also one of its key drawbacks: time. While tenants may prefer what is presumably a shorter term, issues arise when the tenant actually starts looking for a space. The process of searching for a sublease costs a company both time and energy. And most tenants do not account for just how long the office leasing process can take.
The average deal usually lasts at least three months (from starting the search to closing) and that time frame grows if the tenant needs to build-out the space. With a sublease, three months can extend into another three months because subleases require landlord consent. Further, in most cases, the landlord has absolutely no incentive to speed up this process because he or she is getting rent from the existing tenant regardless of the outcome. For a landlord, a sublease can be more burden than benefit, meaning there’s no reason to rush it.
2. Inflexible terms
Subleasing can severely handcuff a tenant compnay’s ability to work out an arrangement that is in its best interest.
Consider the parallel here with sports: Often, when a professional athlete gets traded from one franchise to another, the terms of the original contract stay in place.The athlete’s new home simply adopts the deal.
The same is true in subleasing. And many tenants fail to realize that entering into a sublease means having to deal with an existing contract. A tenant company essentially has its attorney not only negotiate the sublease, but also review the existing contract to assess any risk it may pose.
Tenants may not even have the opportunity to amend the existing agreement, and in some cases there are points that may not work for the new subtenant. This issue may cause a deal to fall through well after the prospective tenant has invested time and money into the search.
In many cases, you have to take a sublease space as-is. Although this may work for a small percentage of tenants, if a new tenant needs work done, the "as-is" scenario is going to cost money, which in turn can negate any savings the new tenant may have had on the price of the space itself.
It’s possible that principal tenants (or lessors) have their own issues, meanwhile, which could complicate things for the new subtenant. A lessor may need to lease out a space because of financial or legal issues, which has the potential to spell disaster for the new subtenant. Any issue has the potential to disrupt the subtenant if officials need to infiltrate the space for any reason.
The lessor will also be one of the three parties to the sublease until the end of the original lease term, and all three parties have to be in good standing to make a sublease work.
Yet another complication that may arise in a sublease is the issue of damage. Depending on the nature of the sublease, the subtenant may be responsible for a security deposit on the space. This could be a portion of the original deposit, or a separate agreement between the landlord and subtenant.
If, as a new subtenant, you don’t do your due diligence regarding damage before you move into a sublease, you may be stuck paying for the dents and bruises of the former tenant.
Obviously every tenant has unique office-space needs. For some, a sublease may be the ideal short-term solution. But for others, co-working spaces might be a better answer. While a sublease is by no means a dealbreaker, well-informed tenants know to thoroughly investigate every sublease option. And, if a deal seems too good to be true, it probably is.