Leases: Tenant Strategy for Excess Space

A weakening economy means many business tenants may seek to cut costs, including rental expense. Since landlords are very reluctant to reduce rent, tenants must consider other alternatives. Two possibilities are a sublease or assignment of unneeded space and a giveback of space to the landlord.

Sublease or Assignment
In the absence of a provision in the lease, a tenant has the right to assign or sublease without the landlord's consent. It is rare, however, for a lease to be silent on the subject. A landlord often takes the position that no consent will be given to a sublease so long as space is available in the building. But a tenant seeking to sublease can make some good arguments for consent.

First, if the market is awash with empty space, a potential sub-tenant is likely to find space elsewhere rather than in the building in question. The landlord is better off having space occupied by a subtenant who may stay in the building after the prime lease expires. Second, permitting the sublease reduces the risk of a default by the present tenant that would lead to a lawsuit or a bankruptcy filing. In addition, the landlord has the additional security of the subtenant's rent. Giving a tenant a green light to shed excess space could pay off when the tenant considers renewal of its present lease. And landlords known for taking a reasonable approach to tenant requests, both during and after lease negotiations, are bound to have an edge when a tenant must choose between similar buildings.

Other Strategies
If a landlord is adamant about refusing consent to a sublease, the tenant should consider some other approaches such as:

• Lease buyout. This is an expensive approach, but unless the tenant is in the property management business, it may be better to negotiate a lump-sum payment to the landlord for taking back the unneeded space than to sit with the space.

• Lease extension. The tenant can try to negotiate a give-back of the unneeded space in exchange for an extension of the term on the retained space. This may be worth doing even if the tenant must pay the unamortized cost of any tenant improvement allowance provided by the landlord at the beginning of the lease as well as return part of any other concessions given by the landlord.

• Space swap. If the landlord owns other property nearby, the tenant may be able to make a downscale move to cheaper or smaller space with only a small penalty. The landlord is more likely to do this if the tenant's existing space is readily marketable.

• Use options. If negotiations with the landlord result in a new lease, the tenant should seek to negotiate for a shorter initial term with a series of renewal options. This approach may be more acceptable to the landlord in a weak market because it costs the landlord little at this time.

• Seek generic space. If new space is being taken by the tenant as a result of any negotiation with the landlord, the tenant should seek generic space, i.e., space that serves the tenant's needs, but with improvements adaptable to other users so that the space will be readily marketable in the future if it becomes excess again.