By Ken Ashley
ATLANTA (November 26th, 2010)
As many Americans are shopping for great deals on Black Friday, many in the corporate world are doing the same. Only those deals aren’t found online at Amazon.com or in some overrun store at 4 in the morning. No, they are increasingly found in the real estate arena.
On many new requirements from clients, the executive in charge will say specifically that they want to look at the sublease market. This is entirely appropriate and an avenue that should be pursued as part of any sensible real estate search. One can get a great real estate deal from the misfortune or change in strategy of another tenant in the market.
Subleases do have downsides, though. We’d like to share just one of the many potential issues in this post in hopes that you don’t get caught up in a similar manner.
Our tale of woe begins with our representation of a client in disposing of a lease via sublease. We marketed their space for sublease and quickly found an interested party. After we reached agreement, the new subtenant decided he wanted to make some physical changes to the space. Unfortunately, the subtenant was unrepresented and didn’t understand the concept of privity of contract which basically means that the landlord is only required to talk to that party with whom they have a contract – ie our client.
The subtenant, in a time critical situation, wanted desperately to contact the landlord to seek his approval of the physical changes to the space. But because of privity, he had to talk to the sublandlord who then transmitted the request to the landlord. It was like a child’s game of telephone. Even worse, the landlord isn’t motivated to move any more quickly than normal in approvals because he is collecting rent all along.
This delay may not seem like a huge issue, but when you are time crunched the ability to talk to someone who can make a decision is very important. In this case the subtenant thought he had a great deal, but he was unable to confirm approval for the build out in time, so he had to hold over at his other facility and pay double rent until everything could be resolved. Very painful, I’m sure.
So, when evaluating a sublease, keep in mind that you must be very specific and clear on what and when – what you intend to do and when it needs to be completed. Also, allow extra time for your project if you intend to chase sublease deals.
It’s tempting to look at a Black Friday kind of rate and think that the rest of thedeal will magically fall into place. But as we saw recently, (and with apologies to the Doors) the tenant in the lease will say I love you, and the landlord won’t even know your name.