Property experts have recently become quite fixated on a new breed of tenant that demands flexibility. And rightfully so.
Post by Libby Humphreys, Director Transactions at The Instant Group
With the BBC reporting that company lifespans have reduced from 67 years in the 1920s to 15 years today, and with the pressing need to address the concerns of an increasingly mobile workforce, that old industry stalwart – the traditional lease – must fall under scrutiny.
Lease terms shift and change over time, but one of the oldest clauses that seems to stick around like the mouldy left-over Christmas turkey in the back of the refrigerator, is subletting.
The idea of a sublease is fundamentally to the benefit of the tenant only. The ability to be able to manage existing liabilities as a business changes is vital, particularly in this ‘new world’ of shorter company life-spans.
A sub-lease, therefore, is an important lease clause that enables flexibility and facilitates the management of cash flow or cost mitigation for a tenant. So why does a sublease clause contain prohibitive restrictions on a tenant and include landlord-biased requirements?
5 Common Restrictions in Sublease Clauses
It is understandable that a landlord will want to access the latest market rents for a building to protect or improve the valuation, however there seems to be a disconnect with the purpose of a sublease in the valuation of buildings. It is treated as a new lease rather than a tenant benefit.
There are 3 restrictions this position creates for a tenant:
• In a falling market, the market rent may be below the sitting tenant’s current rent. A tenant is often restricted to attempt the unachievable and lease it at higher than market, due to a ‘floor’ or ‘collar’ requirement within the sublease clause, stating the subtenant rent must be at or above the tenant rent.
• The market rent may be significantly above the tenant’s current rent. The tenant is enjoying a below-market rent and may prefer to take a position to recuperate costs, but is prevented in doing so as the landlord will only provide consent to sublease at a rent far above the tenant’s rent.
• A tenant is not a landlord and has different drivers. A landlord’s business is letting buildings and to negotiate on a rent in exchange for various other benefits in a lease, such as securing a strong tenant covenant. A tenant in a sublease situation, however, must seek to achieve the rent that the landlord has dictated – irrespective of the deal on the table. This can artificially inflate rents for a sublease beyond what the landlord may have been willing to concede in their own negotiation efforts.
The tenant is never released from paying rent in a sublease scenario – so a landlord requiring a tenant to ensure their sub-tenant is of equal financial standing can be prohibitive, particularly if the company is an AAA rated bank!
UK National Statistics state that 99% of business in the UK is made up of SMEs (fewer than 250 employees) and 96% have fewer than 10 employees – the scope and range of financial standing will be vast and varied, so this can significantly restrict access to available demand in the market in order to comply with financial standing criteria.
In a similar concept, it is often a requirement for the tenant to ask the subtenant to provide a security deposit or bank guarantee directly to the landlord. The landlord logic is fair – there is no direct control over the acts of the subtenant and financial security can assist in allaying the concern.However, the tenant is exposed financially where the sub-tenant is not performing under the lease and also needs to have security over the subtenant. There can be a double-security deposit scenario that overburdens an incoming subtenant, and the sublease starts to appear financially non-viable.
This is a rare clause, but it seems to be picking up speed in locations such as the US. After a landlord has dictated the market rent, the benefit of this rent in the valuation uplift is not enough, and the landlord seeks a share of any profit where the sub-tenant rent is above the tenant’s current rent. The landlord is seeking benefits without paying for any of the costs, like leasing and legal fees, cost to sub-divide the space etc. A case of having ones cake and eating it too!
Leases may state that the landlord cannot unreasonably withhold their consent to a sublease, but this small (albeit essential) part is only the end of a wider marketing and leasing process the tenant has embarked upon.
I once worked on a sublease project for a client where the landlord deliberately ignored the tenant ‘because they didn’t like them! The landlord only becomes interested in the sublease where it is to their own benefit. If a lease is to contain restrictions on a tenant, particularly where they favour the landlord, the least that can be included is a landlord responsiveness requirement in relation to sub-leasing.
For the sake of a balanced argument, there are parts of a sublease clause that cannot be argued as far as protection of the landlord’s rights, including: paying for costs of the sublease (e.g. sub-division of premises, review of legal documents) and abiding by rules, regulations or compliance for the building. Undeniably a landlord needs to protect their investment.
However, in the new age of rapidly changing business environments, these sublease clauses really do need revision to provide greater flexibility to tenants. The modern reality is the rich (and venerable!) tradition of commercial premises’ leases fail to take into account the significant changes to the way we are working. It is time for the market to wake up to this.
Looking for Office Space?
We Operate in Some of the World’s Top Cities:
London, New York, San Francisco, Paris, Singapore, Hong Kong,
Search more locations