The sub culture of sub letting

Getting an accurate picture of the vacancy levels of commercial lease space is not easy at the best of times.

Right now, as businesses are carefully reviewing their space needs, the amount of space available to sub lease has grown considerably; in the office, industrial and retail sectors.

Official vacancy rate calculations don’t take sublet space into account, so in effect there is a “phantom” vacancy level.

Most commercial tenancy agreements allow for sub leasing to occur, and as businesses now shed space to save costs or to deal with reduced activity and staff levels, sublet space is adding significantly to the true amount of vacant space.

Sublet space can be a very good opportunity, both for those searching for premises and for those wishing to save costs. There is also an increased interest in 3PL, third party logistics, where businesses with warehousing, distribution and transport needs outsource these logistics needs, avoiding the need to pay for and manage warehouse, distribution and transport property and that may not be part of their core business.

When it comes to subletting space, there are several challenges to watch out for.

One is higher commission rates charged by realtors to market sub leases. In many instances these are unavoidable. The commissions can go up by as much as 150 percent, so for the tenant wishing to get rid of unwanted or unneeded space, they will need to calculate if the overall savings in lease payments will outweigh the extra commission to pay.

Another variable to consider is weighing up the benefits of sub leasing space versus surrendering a lease altogether.

Sub leasing can be full of traps. Some people approach it in the old traditional kiwi way of making a deal on a handshake. I don’t recommend it. Whether a sub lease is for a very small area or for a considerable space, it pays to get expert advice to avoid trouble, and to make sure everything stacks up from council permits through to lease terms and conditions.

There can be significant penalties in leases if a tenant doesn’t comply with council regulations, or the terms of the lease.

The sub culture of sub letting is an area worth investigating but make sure, as with all cultures, you have guidance through the right cultural practices.

2 thoughts on “The sub culture of sub letting”

  1. Very good and timely article Peter. As a landlord we always prefer a tenant to take advice on subletting as often inappropriate practice can lead to a situation where the landlord is either in breach of local or teritorial authority requirements and is pushed into taking enforcement action under the head lease.
    We have had a number of situations where tenants have significantly disadvantaged themselves by inappropriate subleases.

  2. Hi Peter
    Thanks for your comment. Yes, I believe there is a real danger of this second layer of leasing becoming more important than it has been for a long while. As always, proceeding without doing your homework is dangerous!

    Best regards
    Peter Scott

Leave a Reply