How To Lease Good: Subleasing your excess Warehouse or Office space.
Reduce operating costs by subleasing empty warehouse units or unused office space.
Overheads from property, including rent, utilities, and insurance, are often major business expenses. Maybe you need to cut costs from your office footprint, maybe you’ve had to revise down distribution growth projections, or maybe you just want to make more productive use of your space!
As a commercial occupier, subleasing (also known as ‘subletting’) part of your warehouse or office to a tenant can be a great way to offset a portion of the rent you pay to the landlord. And by renting any unused facilities or floor space that your business is already paying for, you improve efficiency and bottom-line performance.
What is commercial subleasing?
Subleasing is where you rent out part of, or the whole of a leased property to another party, while you remain the primary tenant under your original lease agreement with the landlord. The subtenant pays rent to your business, and you, in turn, continue to pay rent to the landlord.
Commercial subletting can enable you to monetise ‘dead’ or underutilized space.
Whether it’s 1,500sqm of warehouse space that’s going to sit empty for the remaining 2 years of your tenancy; or half of the office floor you’ve realised you don’t need.
Subleasing can give flexibility to your business in the instance you are downsizing, or experience fluctuations in space requirements. We helped eCommerce brand Koala consolidate $1.8 million in p.a savings by subleasing part of their warehouse in Sydney. Would you consider subleasing? Let’s see whether it could work for your business.
First, are you allowed to do a sublease of your office space or warehouse property to a commercial subtenant? Check the lease agreement…
First things first, as the existing tenant and leaseholder, you need to check the lease contract to see what rights you have as the occupier, and whether this includes the right to sublet the property.
Most commercial leases allow the tenant to sublease, or at least to sublease part of the property. But any sublet does require the landlord’s consent, and the terms under which the property can be subleased – to whom, for what, for how long, and at what price – may be subject to negotiation.
By law the landlord must act ‘reasonably’, but they are allowed to impose conditions setting out when they may refuse consent for a sublease. How well these conditions suit the tenant will often come down to the initial lease negotiation. But also, in practice, the lessor’s grounds for refusing a given sublease proposal may be contestable.
Knowing what your legal rights are as a business renting a warehouse or office, and then how to communicate and negotiate with a commercial landlord about the prospect of a sublease, are crucial to making it happen! Tenant representatives specialise in doing just this.
Who can you sublease commercial property to?
In general, a subtenant will need to be deemed ‘financially strong enough’ to take on the lease obligations, and in some cases the lessee may need to enter a Statutory Guarantee that leaves them ultimately liable should the new subtenant not meet the lease obligations.
There are many potential candidates for who may want to sublease part of a warehouse, for example:
- Startups or small businesses: often require storage or distribution space but may not have the resources to lease a large warehouse independently
- e-Commerce retailers: often require space to store inventory and fulfill orders, and may require specific logistics facilities
- Cross-Dock Operations: cross-docking is a logistics practice where products are received and then immediately shipped out without long-term storage. Subletting to a cross-docking business may suit if your warehouse is strategically located for efficient transportation and distribution
- Third-Party Logistics (3PL) providers
What other rules are there about subletting to commercial tenants?
Questions about zoning, sublease term, and rent, and shared expenses, are among a host of important items to consider as part of the sublease agreement.
For example, if you are subleasing part of your high-clearance office, and the subtenant is an eCommerce retailer who would like to use the space for inventory storage and order fulfilment, usage rules may need to be checked.
Furthermore, you would need to make sure you have whatever rights you need if the subtenant were to require alterations made to the space for their use. The lease will usually prohibit structural alterations, but you should seek landlord consent for the right to make internal, non-structural alterations.
If you have shared expenses, such as utilities or maintenance costs, you may be able to divide these costs with your subtenant. Negotiating this sharing arrangement can lower your financial burden.
Remember to review your original lease agreement and, preferably, seek formal tenant representation or legal advice, to ensure any sublease proposal is permissible and compliant.
How to find a tenant for an office sublet or warehouse sublease?
Finding a commercial subtenant is easier said than done. Partly this is because timing is such a big factor: while a landlord may have a lead time of 12-24 months to organise their next tenant, subleasing requirements are often short-notice, with both the tenant and subtenant needing to act quickly.
Time constraints can make it difficult to find a subtenant. There are serious limitations to using online listing platforms, search advertising, posting on your website and social media channels, and traditional print media and signage. You may not find the right candidate in a short timeframe.
Finding a suitable commercial subtenant ASAP demands not only a proactive approach, but also existing market knowledge, industry connections, and deal-making skills. This is a unique selling point of occupier-focused property advisors and tenant representatives – they specialise in working with businesses who want to lease space: they have relationships with a network of potential lessees, agents, and lessors, and, crucially, are aware of market conditions and prevailing rents.
TLG recently managed the negotiation to find a warehouse subtenant for e-Commerce retailer Koala at short-notice, working in partnership with agents from big agencies (Savills and Colliers) to identify, short-list, and negotiate with the preferred subtenant (Swedish electric automotive innovator, Polestar).
When reviewing potential subtenants, due diligence is key. It is important to assess their credibility, financial stability, and compatibility with your business operations. Conducting background checks, verifying references, and drafting clear sublease agreements are crucial steps to ensure a successful subleasing arrangement.
How to negotiate a commercial sublease agreement as the lessee?
For lessees negotiating any commercial property agreement – a warehouse lease, office sublease or otherwise – there are three tips it can be helpful to keep in mind:
Get proper representation.
And weigh up your options carefully before signing anything.
Our top recommendation is simple: get in touch with a commercial property advisor – and make sure they are independent, or (preferably) tenant-only – and specialised in your property type!
If you choose to try and negotiate a sublease agreement alone, see our full blog with tips on how to negotiate a commercial lease, and otherwise consider:
- The relationship with your landlord and getting permission for a commercial sublet
- What you need from the sublease: work it out in concrete terms (pun intended) – how many sqm, what lease term, what price, types of sublessees you are willing or able to consider?
- Drafting a sublease agreement: formulate a plan that addresses key terms and concessions you may be willing to make in negotiations with potential sublessees
- Having a professional tenant representative or solicitor look over your negotiation plan or draft agreement
Ultimately, businesses looking to sublease some office space, or a section of their warehouse may well not be aware of the immediate leasing market dynamics like vacancy rates and buoyancy, the leverage they have in negotiations with a prospective subtenant, or other opportunities available to them. Expert advice can save you time and money.
Finally, review any sublease agreement carefully before signing, and, if you still haven’t – get a professional opinion.
Other ideas for businesses with extra office space or excess warehouse capacity: alternatives to subleasing…
You may find that your current office or warehouse site is just no longer fit for purpose – perhaps your business has pivoted, and your new operation requires less floor space, perhaps you need to drastically cut back costs at short notice, and subleasing just won’t do it. Here a couple of alternatives to commercial subleasing:
Find a new site better suited to your operational requirements – maybe it has less square metreage, maybe it’s in a more affordable area, maybe logistically it’s better located for your supply chain.
Seek to re-negotiate your existing lease agreement with your landlord: see if you can get a better deal, by asking for a rent reduction, more flexibility, or a better incentive
In any case, be sure to review the early break provisions stipulated in your lease agreement. These are the clauses that determine the conditions under which a party can terminate the lease early. If your business’ circumstances have changed and you are considering relocating or shortening your lease term, get advice on what contractual scope there is to achieve this.
Looking to share your warehouse with another business, or sublet part of your company office?
If you are considering a commercial sublease – get in touch.
TLG has 50 years’ experience managing lease and sublease negotiations for tenants in office and warehouse property. Speak to a commercial tenant advisor today.
#HowToLeaseGood is a series about Warehouse, Office and Retail property leasing. Case studies and market insights to empower commercial occupiers.
Check out other articles in the series: