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Spotlight on the option of sub-leasing business premises.

Byline: By Richard Freeman-Wallace

Most business premises are leased rather than purchased outright, to avoid any upfront cash outlay.

As businesses grow, downsize, restructure, relocate or sell off divisions, property liabilities need to be considered.

One option may be to sub-let either the whole or part of the relevant premises to reduce rental costs and overheads.

As companies reorganise their requirements, opening up the availability of space on floors and within parts of buildings, sub-leases could be one of the few "growth" opportunities in the North-East's city office sectors.

Typically the landlord's lease will state that the tenant cannot assign or sublet the lease without he landlord's prior consent which, hopefully, will be granted subject to the landlord acting reasonably. There are a number of areas, on an underletting, which could trap the unwary.

First is the recapture clause. Within the lease there may be a clause enabling the landlord to recapture the space for his own use or for re-leasing.

In that situation the tenant is responsible for lining up a suitable, credit-worthy replacement tenant which the landlord has the right to approve before proceeding.

If the tenant is suitable the landlord, in a recapture situation, may require your lease to be terminated and for a new lease to be put in place, which is usually at the higher market rate.

The landlord, in that situation, will reap the rewards.

Having decided that subleasing is a viable and competitive option there are four main approaches to handling subleases: the buyout, the sublet, the recapture and the write-off.

The buyout is the first choice for tenants and involves the tenant negotiating with the landlord for a cash settlement, releasing the tenant from all outstanding and remaining contractual liability. However, a landlord may be wary of the buyout route, leaving a unit vacant and putting the landlord in the position of finding a new tenant.

Subletting often puts the tenant in a stronger negotiating position, particularly if a strong candidate can be found as the under-tenant. Whether or not this route is viable will depend upon the financial standing of the would-be under-tenant and the amount of work required to convert or improve the office space.

From the landlord's perspective the benefit is not being involved in re-tenanting risks. By proceeding by this route the original tenant will not be released from his original obligations. Whether or not the under-tenant pays the original tenant, the original tenant still has to pay the rent due under its lease to the landlord.

The final option, after recapture, is for the tenant to write off the remaining term of the tenancy and pay all outstanding rent on the vacant office space. This often happens when the remaining term is less than one year.

Subleasing is a competitive option when a business tenant has a suitable under-tenant who is keen to move into the space, there is a supportive and helpful landlord and the proposed space has its own facilities including its own access, thereby minimising disruption.

Richard Freeman-Wallace is head of property at law firm Watson Burton
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2006 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Business
Publication:The Journal (Newcastle, England)
Date:Feb 15, 2006
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