Five steps to a safer sublease

by Robert A. Miller and Brian L. Miller   On the surface, subleasing appears to be a good option for tenants looking for office spaces that work for them. Yet subleases are fraught with potential problems. Follow these five simple yet essential strategies to help protect your clients when negotiating to rent sublease space.

1. Pay sublease rental payments directly to the landlord. Relying on the sublessor to make your client’s rent payments is a risky proposition, so it is critical that your client pays rent directly to the landlord. In addition to making sure the payment ends up where it should, doing so builds credit with the landlord, which will come in handy in the event the sublessor is no longer able to pay his part of the rent or if your client wants to do a direct deal at the end of the sublease.
2. Keep the sublessee in the communication pipeline. Knowing what is happening between the landlord and sublessor helps your client avoid problems such as an unexpected dispossessory notice. Therefore, insist that he is copied on all communication. Also, state in the sublease agreement that the landlord is authorized to release information to the sublessee. Your client should communicate with the sublessor and the landlord on a regular basis, so he is aware of potential concerns before they become problems.
3. Obtain the sublessor’s financials. Examining the sublessor’s financial statements provides information about the viability of entering into the sublease. Not doing so may place your client in a situation that costs valuable time and money.
4. Get first right of refusal. Employ language in the sublease giving your client first right to lease the space directly from the landlord if the sublessor either terminates or defaults on the lease. This virtually eliminates the possibility of another tenant leasing your client’s space in such a situation.
5. Get an option to lease clause. Similar to the previous strategy, negotiate an option-to-lease clause with a predetermined rate and terms. Therefore, if the sublessor defaults, your client can lease the space directly from the landlord, possibly at a below-market rate.

The sublease market is changing. Many real estate professionals agree that sublease availability is near or at its apex. But until this market subsides, employing these strategies gives your clients confidence in their subleasing decisions.

Robert A. Miller, CCIM, and Brian L. Miller are principals of the Miller Group LLC, a specialized office leasing company in Atlanta. Contact them at 770/451-4455 or robertmiller@ccim.net.

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