How to Lease Commercial Real Estate
Here we examine the necessary steps involved and issues you should consider when contemplating subleasing space. When you determine that you have excess space; it’s best to contact an agent to help and advise you to get the right sublet tenant and the appropriate rent for your requirements.
1. Your agent will discuss market comparables, competing sublets, recent transactions, market trends, and recent developments in the building to help determine an Asking Rate and expectations on a % recovery. Consider the following:
- Generally, the shorter the remaining length of term, the less marketable the premises and the lower the rate that can be achieved.
- In order to remain competitive it is worthwhile to offer incentives to prospects (or their agents) on “short-term” or “hard to lease” subleases.
- Is there any contiguous space next door or competing space available for lease in the building?
- Is the building in high demand?
2. Your agent will review your Lease, in particular the section pertaining to Assignment, Subletting and Transfers, and any restrictions on such. Items to pay attention to are as follows:
- Can you sublease your premises for more than what you are currently paying (i.e. can you profit?).
- Can you recuperate any out-of-pocket expenses such as legal fees and painting the premises?
- Is there a provision in the lease that prevents you from subleasing your premises for less than what you are currently paying?
- Are there any restrictions on subleasing to an existing tenant in the building, or to a tenant in another building owned by the same landlord?
- Does the landlord have the right to terminate your lease, and if so, on what terms and what are the notice periods? (30 days, 90 days, 120 days?).
- Are you permitted to “advertise” a rate?
- What will you be charged by the landlord for their “consent” to the sublease?
- Are you required to “make good” or “restore” your premises at the end of your term?
3. Your broker/agent will draft a Sublisting Agreement outlining the main terms and conditions to list and market your premises.
4. Your agent will prepare all necessary marketing materials. They will photograph your premises and will require an up-to-date floor plan. Issues to consider are as follows:
- When are the premises available for occupancy? Is it contingent on acquiring new premises?
- Is any furniture available? Will it be part of the deal or separated out? Furniture depreciates very quickly and will typically only command $0.10 to $0.50 on the dollar.
- Are the following items available: phone system, handsets, server racks, computer cabling, built-in audio-visual equipment, and supplemental cooling units?
- If your suite has an unusual layout, or requires work, will you offer to pay for improvements or alterations for a prospective subtenant?
- Will you cover the cost of a space plan for a prospective subtenant (similar to what most landlords will do)?
5. Your agent will inform the Head Landlord that your premises are going to be marketed for sublease.
- If required as per the lease, your agent will forward the marketing materials to the Head Landlord for their approval.
- Your agent will initiate discussions for a potential termination of your lease, and maintain on-going communications with the landlord pertaining to this.
- Your agent will explore any potential prospects that the landlord may have within the building.
6. You will need to make arrangements for your agent to access the premises for showings.
- During regular business hours?
- Will someone always be in the office?
- Will you need to provide a key or access card to your agent?
- Are there any restricted areas?
- Your agent will get some calls from prospects wishing to tour the premises “5 minutes from now”. Can you give your agent the flexibility to do this?
7. Your agent will present any Offers and perform any necessary financial analysis.
- How quickly can you respond? A very slow response time will often result in the prospect moving on to another option.
- Once an offer has been Conditionally Accepted we will send the credit information from the Subtenant to a credit check company. The cost of the credit review is a cost of the Sublandlord.
8. Once the Offer terms are negotiated, your agent will formally request the Landlord’s Consent. The landlord’s consent is usually a 2 to 5-page document (the “Consent Agreement”) outlining the terms of the consent and the obligations of all 3 parties (subtenant, sublandlord and head landlord). The Consent Agreement will need to be signed by all 3 parties. If there is a lot of “back and forth” on the Consent Agreement, the landlord’s legal fees will be higher, and this cost ultimately gets passed on to you.
9. Your lawyer will need to draft a formal Sublease which incorporates the terms and conditions of the Offer. Sometimes the landlord will want the Sublease document to be fully executed prior to providing their consent.
10. You’re done!
By Chris Fyvie, and Office Search Toronto .
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