Even after downsizing, many companies still find themselves stuck as tenants leasing more space than needed or with rents they can no longer afford to pay. These companies then run the risk of going into default on the lease or possible eviction from the space. They could also lose any security deposits or find themselves owing money as the result of the landlords’ draw of letters of credit if they cannot keep promises under the lease.
It’s a loss for the landlords, too, if the tenants default, since landlords of vacant spaces are not receiving the income needed to pay debt service owed to their lenders or to pay operating expenses for the property.
“Many tenants took on space needed at the outset of the lease without foresight that they would downsize in the current economic climate,” says Juliana Stamato, real estate attorney with Theodora Oringher Miller & Richman PC. “Tenants then find themselves paying rent on space that is no longer needed or paying above market rent in the face of declining revenues.”
Smart Business spoke with Stamato about the different options and strategies that tenants and landlords can utilize to cope with these challenges.
What options do tenants have if they are leasing too much space?
Tenants can consider moving out of the premises and assigning the entire lease to a new tenant or subletting some of the space. Tenants should review the lease to determine whether the lease permits assignments and subleasing. Most commercial leases require the landlord’s consent for assignments and subleases, and many leases list criteria that must be satisfied in order to obtain the landlord’s consent, such as establishing that the proposed new tenant has the financial strength to honor the lease obligations. Tenants will need to allow plenty of time for finding a new tenant or subtenant and obtaining the landlord’s consent.
How can you find a tenant or subtenant for your space?
You should meet with your broker and explore current market conditions and possible candidates for the space. If you are paying above market rent, you will need to be prepared to lower the rent for your new tenant or subtenant and pay the difference to the landlord. You also need to assess the desirability of the space. For example, it may be difficult to find a new tenant or subtenant if your premises have highly specialized tenant improvements that need to be changed, if parking is an issue or if there is too little time remaining on the lease. Or perhaps the configuration of your leased premises doesn’t work for subleasing. If you can’t find a new tenant or subtenant, another option is to try to restructure or modify the lease.
