When you lease a commercial space, it’s usually advisable to make certain that you have the right sized space for your operations. Renting a property that has areas you aren’t utilizing is an inefficient use of your capital. However, there may be circumstances in which this is unavoidable. There might only be larger properties available in your location. You could even be leasing a unit with extra space to accommodate your future growth plans.
So, how can you best ensure that this space is not wasted? One of the best options available to you may be subletting your commercial space. This is where you rent a portion of the property you’re leasing to a third party. The result is the additional square footage gets used and you gain some additional revenue to offset your overheads and perhaps a little extra.
Nevertheless, this isn’t a process you can or should undertake casually. Subletting your commercial space effectively requires some planning. We’re going to take a closer look at the concept.
Review Your Current Lease
The first thing to understand is that, while you’re occupying the property this doesn’t mean you have the same rights as you would if you were owning it. As such, you are first and foremost subject to the terms of your lease. Before you start to look for potential tenants, it’s important to thoroughly review your current lease paperwork to identify areas that may affect your subletting.
In some cases, you may find that your lease states that you cannot sublet to other tenants under any circumstances. This is not an unusual clause to find in a standard commercial contract. Understandably, a commercial landlord doesn’t want to miss out on potential revenue from their properties. If your lease states that you cannot sublet, don’t be tempted to proceed regardless. This can see you in breach of your contract and at best evicted and at worst subject to litigation.
Even if your contact does allow for subletting your commercial space, there are still likely to be terms and limitations. This is particularly relevant if you are leasing units in a mall, office building, or business park. The landowner of the entire property may well have “no competition” agreements with other tenants which limit the types of company that can operate within a certain distance of those businesses. You may also find you must provide your landlord with a specific percentage of the income you generate from subletting, which will influence the amount you charge.
Most commercial leases are relatively clear on the subject of subletting. Indeed, there will usually be a section of the contract dedicated to the subject. However, if you’re in any way unclear, it’s important to have your attorney review the terms.
Talk to Your Landlord
Your next step is to talk to your landlord about your intentions to sublet. Even if this isn’t strictly required in the terms of your lease, it’s both wise and considerate to do so anyway. You’ll find this demonstrates to your landlord that you’re an open and communicative tenant, which can strengthen your relationship with them.
This also gives your landlord an opportunity to raise any objections and concerns they may have. If your landlord expresses limitations or demands that are outside of the terms of your rental agreement, it’s important to address these calmly but firmly. Make it clear that you understand the terms of your lease and are operating within them.
You may also find there are positives to discussing the matter with your landlord. They are likely to have experience in navigating the local commercial real estate market. They might offer you advice and even direct you to potential tenants who have been looking for the type of space you’re planning to sublet.
Perform Some Market Research
While you may have significant expertise in your field, this doesn’t always equate to knowledge relevant to subletting your commercial space. As with any new business opportunity, it’s important to start with solid research.
You should gain data on the local commercial real estate market in the following areas:
- Prices
There are various elements you need to bear in mind when determining the price of the space you want to sublet. This can’t just be a figure you reach by guesstimating the amount of revenue you’d like to bring in. The commercial real estate market largely dictates what is an appropriate value and this can vary significantly depending on certain factors. Location, size, amenities, and nearby businesses can all influence the average prices of the market. For example, currently there are tons of buildings with empty office space due to the work from home movement. This is a good example of how price can impact your plans. It’s recommended to look at comparative market analysis on the value of your space.
- Industries
The property you need to sublet isn’t going to be suitable for businesses in all industries. You’ll find that your approach to subletting your commercial space will be more effective if you take a more targeted route. Therefore, you’ll need to do some research into what types of business are most appropriate for the size, location, and amenities you have to spare. This gives you a solid demographic to direct your outreach towards.
- Potential tenants
In most commercial lease scenarios, outreach to potential tenants is undertaken by an agent or property management business. While there are brokers that specialize in subleasing, this isn’t always going to be the most cost-effective approach. The profit margins are likely to be tight already and brokers will take a sizable amount of this income. As such, it’s worth putting in some time to research potential tenants personally. You could do this by talking to other business owners in your network or posting for leads on professional social media platforms like LinkedIn.
Vet Potential Renters
When you’re subletting your commercial space you’re also taking on additional responsibilities as a tenant. The last thing you want is to sublet to a business owner that is likely to cause damage or misuse the property. The fallout of this ultimately sees you footing the cost for any repairs or replacements. Not to mention that you don’t want to be chasing late rental payments. As such, it’s important to vet your potential renters.
Make sure that all potential tenants submit a range of supporting documents to you. This should include financial records so you can see they have not just the current funds to make rent but also a reliable cash flow. It’s also wise for them to provide you with a full account of their business history alongside references for previous commercial landlords. Be thorough in reviewing these documents and follow up with any references to confirm their legitimacy.
Provide Fair Terms
Once you’ve found a positive tenant to sublet your commercial space, it’s important to provide them with fair contract terms. Don’t draw up the rental contract yourself if you don’t have expertise in the area. Utilize your attorney to make sure you provide a sublease that protects both you as their landlord and them as a tenant.
Set reasonable expectations for maintaining the condition of the property. Recognize that a subletting situation is not intended to be a long-term solution for either you or your tenant. As such, there should be lease periods that don’t lock you or them in for unreasonable lengths of time. Indeed, include mutually fair options to terminate the lease early with a practical amount of notice.
Wrapping Up
Subletting your commercial space can be a practical way to make certain the property you’re renting is an efficient asset to your business. However, it’s important to approach the process with planning and professionalism. Be clear on any limitations your current contract has on subleases and keep your landlord informed of the situation. Remember to perform research into the property market and vet your potential tenants thoroughly. You may not be a professional landlord, but by making certain you plan ahead and maintain fair terms with your subletting tenant, everyone involved can benefit from a positive experience.
