Today, we begin a series of articles on the various aspects of a commercial real estate lease. To kick it off, we present a two-part piece on a commercial sublease, first focusing on the rights and obligations of a tenant when subletting a commercial property.
Subleasing a commercial space means renting out a property you have already leased to another party. The right to enter a commercial sublease is one of the most important clauses in a commercial real estate lease. Commercial leases often favor the landlord since the document is usually authored by the property owner’s attorney. But there are some elements you should pay close attention to before signing a commercial space lease.
Unlike residential leases which usually cover a time of one to two years, most commercial leases are for a longer period, with at least three to five years being the norm. With the cost of construction skyrocketing in recent years, many owners are favoring seven- to 10-year leases if the tenant requires major construction in their spaces. Which is why it is essential you have the right to secure a commercial real estate sublease or assign the lease before it is executed.
The landlord typically includes wording that requires the owner’s approval before the renter can enter a commercial sublease. The wording will vary – it could be fairer to the tenant if it reads such as, “the tenant needs to receive the landlord’s approval, which shall not be unreasonably withheld, conditioned, or delayed.” Or the landlord could be less lenient and include language like “the landlord may withhold its consent in its sole and unfettered discretion.” It is always helpful to add in parameters if possible.
Landlords usually add in a clause that requires the tenant to pay the landlord’s legal fees for reviewing a commercial sublease. We recommend tenants look to remove that clause or, at the very least, settle on a dollar amount cap required to get approval.
Another factor to pay attention to is who gets the profits that may result from the commercial sublease. In many cases, the lease will state the landlord has the right to receive all or part of any profit the tenant derives from the subleasing of the owner’s space. But what constitutes profit? Is it simply the excess amount of rent the sub-landlord receives? Or could there be other factors that would allow the sub-landlord to have the sub-tenant pay more rent and yet it not be profit? We will discuss this topic in greater detail in part two of this article on a commercial sublease.
There are some ways to minimize a profit owed to a landlord and yet still produce extra rental income for the sub-landlord including:
- Deducting the rent that would have been paid had a sub-tenant been in the space while the space was vacant
- Any improvement allowance given to the sub-tenant
- Any free rent given to the sub-tenant
- Lease takeover payments
- Attorney fees
- Brokerage commissions
- Costs of advertising
- Unamortized cost of initial and subsequent improvements to the premises.
Again, keep in mind that a commercial lease isn’t intended to be fair for all parties – it is written to benefit the property owner. A commercial real estate lease places most of the obligations and responsibilities on the tenant and causes the tenant to give up some of its rights afforded by law. Which is why it is imperative to understand what is included in the lease as written and negotiate where possible, especially when it comes to commercial subleases.
McBride Corporate Real Estate has been serving corporate America’s real estate needs since 1959. If we can use our deep expertise in commercial real estate brokerage to help you navigate a commercial sublease that’s right for your business, please contact us today.
In future editions, we will discuss more facets of commercial leasing, including landlord approvals, insurance clauses, operating expense pass through and real estate taxes, a tenant’s right in default, and many others. If you have one that interests you, contact me at tillsleyr@mcbridecorpre.com and I’ll cover it next.
