Subleasing Profits and Your Lease

It’s interesting to go back 30+ years and look at how specific lease issues were handled differently then versus now. Here’s an example: in the 1970’s it wasn’t all that typical for leases to contain landlord recapture clauses for sublease profits. Back then if you as a tenant needed, for successful or unsuccessful business reasons, to sublease your office or industrial space, you were allowed to keep any differential or profit. So, if you originally leased an office space at $1.50/rsf/month, and the market was now $2.00/rsf/month and you subleased it at that rate, most leases went silent on who would get that profit.

That seems hard to believe knowing today’s market. In those days, brokers would literally look for tenants who leased space at rates much lower than the then current market and suggest they consider subleasing. Or sublease a portion at the then higher rates, so as to cover their total rent on the remaining space. A 20,000sf tenant could sublease half their space in some cases and the profit would cover the amount they were paying on the remaining 10,000sf half.

Fast forward several years and landlords got smarter. For a long time starting in the 1980’s and 1990’s they actually started to negotiate that in the case of a sublease the landlord would recover all the profits. It took a few years, but they then realized that no tenant would try and sublease for a higher rent then they were paying. Why generate profits for a landlord? Funny enough when doing leasing throughout the US, we still find landlords arguing for that 100% recapture of profits condition in their new leases.

Today when we negotiate the sublease profits conditions in our client’s new leases we work to get our clients a 50-50 split of the profits with the landlord. And by the way, even in rising rent markets, it’s surprising how often tenants still have to discount the sublease rent off the market rates to get a tenant.

Importantly, we counsel tenants that they should make sure they offset the profits amount by any costs they incur to sublease. That can include marketing costs, vacancy costs while the space is marketed, tenant improvement costs if needed, and broker’s/architects/attorney fees as needed.

TMC has a long history of approaching the tenant rep service from our corporate real estate background. We know that having to sublease an existing space for good or bad business reasons can become a necessity. Preparing for that process at the time of negotiating your original lease is valuable. We understand these and many other lease issues that arise during a term. We protect you from future situations as part of our tenant representation service.