Subleasing an Increasingly Beneficial Arrangement During COVID-19

Published July 20, 2020 by Real Estate Leads

Being successful in business – any business, and that includes real estate – requires you to be nimble on your foot and able to ‘roll with the punches’ as the expression goes. Well, here in the summer of 2020 we are definitely rolling with the quite the collective barrage of punches known as COVID-19 and businesses of all sorts are having to do what it takes not to get knocked over. One thing we’re seeing in commercial real estate in Canada is that subleasing of commercial properties is becoming a viable option for companies looking to right-size their workspaces.

Most real estate agents in Canada works exclusively on the residential property side of things, but many may still have investor clients investing in REITs or similar investments where the commercial market is a very real part of the picture. Attracting and retaining clients is difficult at the best of times, and now even more so than perhaps at any time previous. Here at Real Estate Leads our online real estate lead generations service is an excellent way to put the power of Internet marketing behind your efforts to meet prospective clients who are genuinely ready to make a real estate move in the near future.

But back to topic, it’s an interesting development to see the idea of subleasing commercial properties gain traction the way it has, and it’s yet another way to see how the real estate industry is perhaps more resilient than people give it credit for in light of what’s happening in our world today.

Subleasing has the potential to be beneficial for both the sublandlord, subtenant, and landlord. Here’s how:

Workspace Adjustment with Relocation or Vacating

It’s probably fair to say that right now we’re seeing the largest work-from-home experiment ever, and with each instance where it’s proving to be doable we are learning that a good portion of the workforce could continue to telework post-pandemic. A study in May indicated that approximately four-in-10 Canadians have jobs that lend themselves to being done from home online.

That goes along with another report saying four-out-of-five employees would like to work remotely at least one day per week after all of this passes. Where we’re going with this is that if company owners and their HR directors see the potential in having a smaller needed workspace because of fewer people working in that space, the savings that will come from leasing a smaller office space is going to be appealing.

However, what if they’re quite happy with they are and would rather keep the space while still gaining the benefits – both for themselves and their employees – that come from having many working from home. In this instance subleasing becomes an option. Subleasing allows you to offload the space you don’t need and stay at the same address, while also offsetting total rent costs.

What are the benefits for the Sublandlord? These ones:

Retain control of the space and relationship with the landlord

A sublease arrangement makes it so that a new landlord-tenant relationship is established with the subtenant and it controls all interactions pertaining to the sublease between sublandlord and subtenant.

Relationship with the head landlord is similarly maintained

Depending on your sublease terms and any requirements the head landlord may have for a direct agreement with the subtenant, the subtenant may not have any direct interaction with the head landlord.

Retaining of Space Flexibility

The tenant may need less square footage but still retain a level of space flexibility, and in this instance the property owner may arrange a sublease for half the space for a short term and create the separated office or production floor workspace by installing a demising wall separating the existing space from that of the new subtenant.

Should more space be needed at the end of the sublease term, the leasee can reclaim the sublet portion of their workspace for the balance of the head lease term.

Reduce Costs

Paying rent has been such a challenge for businesses during the pandemic that the government has had no choice but to offer a commercial rent relief program. It’s estimated that 21 per cent of Collier’s International’s 7,100 commercial tenants across Canada requested rent relief in April.

Affected businesses’ inability to pay rent is expected to remain an issue following the reopening of provincial economies, and without going into unnecessary detail for anyone who’s in the situation and is in a lease for a commercial space then subleasing with a subtenant can greatly mitigate their costs.

Subtenant Benefits

  • Moving into a fully built-out space at a fraction of the cost, plus enjoying a sublease agreement that allows them to go right ahead and occupy a pre-finished, move-in-ready premises, saving them customization or repair costs.
  • A space likely maintained in good condition.
  • Limited transaction costs.

Subleases are typically conducted on an as-is basis without landlord’s work or inducements, lowering sublease rental rates for these individuals as well. Plus, the sublease may be for furnished premises or the subtenant may have the option to buy existing, tailored workspace furniture and further reduce reorganization costs associated with all of this.

Lastly, they may also be possibly paying lower rent too. Anyone who is a business owner needing to relocate to a smaller space and would prefer to avoid a long-term lease now has more options to secure the workspace they need and at more favourable terms nowadays.

Landlord Benefits

First of all, landlords maintain their cash flow, and in particular subleasing allows them to maintain cash flow by retaining the original face rates on their head lease. Should an original tenant experience financial difficulty and can’t pay rent then presenting a potential sublease agreement and having it accepted assures them of monthly rent payments from the subtenant.

The landlord is also kept safe from exposure to vacancy costs, which can be very problematic in a time like this when new qualified tenants may be hard to come by. Many businesses are vulnerable to financial difficulty now, and rent is too often an obligation they cant’ fulfill.

By permitting existing tenants to enter into sublease arrangements, these landlords protect themselves from vacancy costs and other transaction costs related to backfilling and releasing empty space. The space remains occupied, costs are better controlled and finances are afforded more overall security.

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