SUBLEASE RISKS – SUBLESSOR’S PERSPECTIVE

Subleasing commercial real estate space can offer benefits to the sublessor, such as offsetting costs and avoiding breaking a lease, but it also comes with various risks:

1. Default Risk: If the sublessee fails to pay rent, the sublessor remains liable for the full rent payment to the landlord. This could result in financial strain, especially if the sublessor relies on the sublease income to cover their lease obligations.
2. Damage to Property: The sublessee may cause damage to the property. While security deposits can mitigate this risk, they may not cover the full extent of the damage, and the sublessor could incur additional repair costs.
3. Violation of Original Lease Terms: Many leases have clauses that restrict or outright forbid subleasing without the landlord’s consent. Subleasing without permission can lead to lease violations, risking legal action or lease termination by the landlord.
4. Operational Disruptions: The sublessee’s business operations might disrupt or conflict with those of the sublessor or other tenants in the building. This can lead to complaints, strained relations, or even legal issues if the disruption violates building policies or local ordinances.
5. Quality of Sublessee: The sublessor assumes the risk of the sublessee’s reliability and financial stability. A poorly chosen sublessee may result in more frequent and severe issues, such as delayed payments or neglect of space maintenance.
6. Legal and Administrative Costs: Subleasing typically involves legalities, including drafting a sublease agreement, obtaining the landlord’s consent, and potentially negotiating terms with both the sublessee and the original landlord. This process can incur legal and administrative costs.
7. Reputation Risk: If the sublessee conducts business in a manner that is unprofessional or unethical, it could reflect poorly on the sublessor, especially if both businesses are known to be associated with each other.
8. Market Risk: If the market rent is below what the sublessor is obligated to pay the landlord, the sublessor may find it challenging to find a sublessee willing to pay enough to cover the original lease costs, potentially leading to a financial loss.

To mitigate these risks, it is important for the sublessor to conduct thorough due diligence on potential sublessees, ensure compliance with the original lease terms, and seek the advice of professionals to create a comprehensive sublease agreement.