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This is a case study in which Lease Ref assisted a client to get through a sticky subletting situation.
Subleases are less attractive than direct leases for the following reasons:
Since there are so many downsides to subletting, why would a tenant be interested in sublets in the first place?
Sublessors know that to overcome the list of negatives compared to leasing direct space, sublets must be offered at a discount relative to landlord space.
Did we forget one of the downsides?
Often when tenants are subletting their premises it is because business is not going well and they are looking to shed costs. In the event that a sublandlord defaults on his lease, the subtenant is in a compromising position.
The subtenant has a legal contract with the sublandlord and the sublandlord has a legal contract with the head landlord, but the subtenant and head landlord have no relationship.
Our client was a subtenant, paying $30 per square foot to the sublandlord, and the sublandlord was paying $40 per square foot to the landlord. In other words, this:
And then one day, this happened:
For some reason it took the landlord three months to figure out that they were not receiving any rent. The client wondered if the landlord:
Incidentally, it was gorgeous space that could achieve above market rent (and the market at the time was $45 gross, not the $40 gross the sublandlord was paying).
Lease Ref was quick to point out that since the client has no legal tie to the landlord they are not liable for the last three months of rent. It was the landlord's fault for not noticing.
Although the landlord had no obligation to keep the tenant in the space, Lease Ref completed an indifference analysis for the client and recommended staying in the space at the existing rental rate.
The landlord would likely have had six months of downtime in marketing the premises, would have had to include some leasehold improvements and pay brokerage fees. The client ended up signing a new lease for just one year at the same rate with an option to renew at fair market value.
At the end of the lease the tenant moved on to another sublet deal and the landlord leased the space at $45. The savings compared to being forced to pay the $45 gross for that year was ($45-$30) x 5,000 square feet = $75,000.
What's in your lease?