Sub-Leasing your office space – Pros, Cons + Practicalities

Whilst some of us are planning to come back into the office permanently, many of us would also like to understand what options we have available whilst maximising our return on investment. The sooner we can take back some of that profit, the sooner we can ‘put all this behind us’ and plan to limit any effects of this pandemic and maximise any opportunities we have available. Here at Officescape, we have developed this article to help you understand what post COVID-19 will look like for your office but also what your options are, based on the nature of your lease.

We all know property is one of the biggest expenses we have in business, are there any cost savings we can make, given we may be thinking of flexible office options for the foreseeable future, or at least in 2021?

We spoke to The Lease Negotiator, Jonathan Hand, and we learnt some things that we think may be useful for you. We hope the facts we have collated in this blog will help you make informed decisions and maximise your profitability.

Firstly, a quick introduction, Jonathan acts as a property expert exclusively for occupiers, hence the name ‘The Lease Negotiator’. Jonathan has been in the business for over 30 years, works throughout the UK and is just a thoroughly nice, knowledgeable guy who helps take the pain out of those property deliberations/negotiations and saves you money in the process.

We asked Jonathan questions that many of our clients have been asking us over the last few months and we think the answers may be useful to our readers too.

If you have a lease on a building which is now surplus to requirements or too large what are your options? Could you sub-lease your current office space?

The first place to start is to have a look at your lease (or get us to check it out for you with our free 30-minute consultation). Check when the lease ends and whether there is an option for you to break the lease prior to the end date. Depending on the length of time remaining, this will then determine what your next move is. If you can’t wait until the end of the lease to hand the property back to the landlord or there is no earlier break clause, then the next step is to check the alienation clauses within your lease. (Beware of your obligation to hand the property back in a condition that is stipulated under the terms of the lease. This is another topic for another day).  Now, back to the alienation clauses. When agreeing to the lease, you might have negotiated these. Typically, a tenant will have the right to either assign the lease (which is transfer the lease to a third party) or sublet (which means creating an under-lease). Beware, many leases only allow sub-letting of the whole property and not the part. If this is the case and you wanted to stay in part of the property, then you will require a variation of the lease and the landlord’s agreement (which they are not obliged to give). The requirements for either an assignment or sub-letting are contained within the lease and it will set out the grounds upon which these can be granted by the landlord, subject to their consent. Even if you assign or sub-let you will continue to have some liability, should your assignee or sub-tenant default, so, choose wisely. Whether you can achieve an assignment or sub-letting will depend upon the market forces of supply and demand and how desirable your property is to other businesses.

What if you go through the above process and are still unable to find an alternative business to take on the space?

One final option is to approach the landlord for concessions, a variation of the lease, or to see whether they will consider a lease surrender. A lease surrender brings the lease to an end. The landlord, if agreeable to this, will often seek a financial payment as compensation for giving up the lease. The cost is dependent on a wide variety of factors but lies largely on the negotiating strength of either party. Before you start any negotiations with the landlord, it is important to have a very clear objective of what you want to achieve. Be clear on what option best suits you as a business going forward. Once you have worked out what best fits you, you also need to look at the situation from the landlord’s perspective. Not all landlords are wealthy or corporate, many rely on the rent they receive to fund their retirement or pay off a mortgage. In my experience, landlords are looking for one of two things. One is the security of income, the second is maximising their returns. Do you and the landlord’s objectives match? Being tied into a lease puts the obligation on you as the tenant to come up with a workable solution. Landlords will appreciate you coming to them with a possible solution, rather than just a problem.

We cannot afford the rent, or we do not need the space anymore. So, what possible solutions are there?

If you are looking to negotiate a rent decrease, perhaps offering a longer length of lease could improve your chances of coming to an agreement. This improves the landlord’s security of income, but if the landlord is looking to maximise returns, there will be a conflict. Making a decision on how to proceed can become particularly complex as other factors have an impact on the nature of the market for that particular type of property. If the landlord plays hard ball and is not prepared to agree, is there a risk of you defaulting and the landlord being left with an empty property? A tenant paying a lower rent might be better than no tenant at all. Their attitude might be a lot harder if there were other potential tenants to take on the space. The other factor is the landlord’s own circumstances. As I have mentioned, not all landlords are wealthy, therefore, their decision often depends on whether they themselves can afford to take a hit. Depending on your relationship with the landlord, expect the landlord to be suspicious and sceptical. They might want to see accounts or management accounts to demonstrate that you are struggling. There are other variations of the lease that can be considered. Having a clear objective allows you to pick out the one that best fits.

Hopefully, this article answers some questions for you. Should you have any other queries, Jonathan has agreed to give our clients a free consultation on a ‘first come, first-served basis’. 

For a free half-hour consultation with Jonathan, please contact Susan Tomlinson @:stomlinson@officescapellp.co.uk.

**Please note that meeting slots with Jonathan are subject to availability and priority in terms of urgency for assistance.