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Midtown has notoriously been the center hub for office space in Manhattan — until now. While some companies had already begun to slowly embrace the idea of remote employment, COVID-19 has all but forced many businesses to dive into the deep end of work-from-home life. But, what happens then to these large empty commercial office spaces?
Commercial subleasing has always been an option for tenants. But, recently, it has also become a popular option for smaller businesses to obtain office space in prime NYC locations at lower-than-market rates. Specifically, a sublease allows commercial tenants and landlords to maintain their agreed-upon lease, while also offering a space for smaller businesses to take on a portion of the lease obligations.
Now, with commercial subleasing on the rise, it’s vital for interested parties to fully understand the benefits, as well as any potential legal issues to look out for.
When a Tenant Might Sublease Their Commercial Space
A tenant might consider subleasing their commercial space if they occupy more space than they’re currently using. For example, some companies may only have a small percentage of their staff working in their physical office space, thus leaving half of the space potentially unused.
In this situation, the larger company (known as the “sublessor”) would utilize 50% of the space and sublease the remaining 50% to several smaller businesses (known as “sublessees”) to split. Then, those multiple companies would jointly take responsibility for 50% of the rent obligations and other obligations under the lease, while also gaining the benefits of office space in a prime location.
Another scenario could be commercial tenants who now have their employees working fully remote and who have no concrete timeline for when they will be back in their physical office space. Consequently, in an effort to keep payments rolling on their long-term lease, they may look to find a sublessor to take over the entire space for a specific period of time or for the entire remaining term of the lease. Additionally, subleasing could save a sublessor from potentially defaulting on the lease terms, and paying a high fee to the landlord to cancel.
Why Subleasing May Be a Great Option for Small Businesses
When subleasing a portion of a full commercial space, the sublessor often gains some perks that come with the space — without bearing the responsibility. An example would be avoiding extra charges — such as common area maintenance, a mailing system and sometimes even Wi-Fi — which could remain the responsibility of the sublessor.
It’s also important to note that qualifying for a commercial sublease can be even easier than being approved for a new lease.
What Commercial Tenants Should Consider When Subleasing
When a commercial tenant decides to consider subleasing to ease their rental obligations, they’ll often need to review their original lease and notify their landlord. That’s because all subleases are subject to the landlord’s review and approval. A landlord may also charge various fees for reviewing the subtenant’s financials and drafting the agreements for the subtenancy.
Additionally, commercial landlords may have included terms in their lease agreements regarding consent restrictions and recapture rights on the space. In particular, consent restrictions may permit the landlord to dictate or restrict the type of sublessor that will take over the space.
Conversely, the right to recapture could potentially allow the landlord to take back the space at even the consideration or request of a sublease.
There are many things for each party to consider when contemplating a sublease, but it could definitely be a beneficial solution for all parties involved — especially during these uncertain times.
Real Estate and Corporate Transactions Attorney Nataly Goldstein is a graduate of Cardozo School of Law, where she served as President of the Real Estate Law Association. She is experienced in both residential and commercial real estate transactions, and she prides herself on guiding her clients through every step of their transaction, whether they are first home buyers or franchised businesses.