A Broker's Perspective: How to Position Your Company for Success in Subleasing Office Space

It is important for tenants to consider potential 'exit strategies' when initially leasing space. Tenants generally lease space for an extended period of time, and forget that they may need or want to get out of the lease or sublease a portion of their premises prior to the expiration of their lease. When considering leasing office space, tenants should contemplate how easily the space can be demised and marketed for sublease. Further, tenants should consider whether one location, building or landlord would be more appealing to potential subtenants than another.

It is also important to negotiate into the lease document specifically crafted provisions that can and will make subleasing easier and less costly. Restrictions on subleasing are often overlooked during lease negotiations, and these restrictions can severely hamper a tenant's disposition efforts. Most leases require that the tenant provide the landlord notice of a proposed sublease and a 30- to 45-day window to approve any subleases. One should negotiate as short an approval period as possible, deeming the landlord's failure to respond as an approval of the sublease deal. A company should also keep its landlord well informed about the tenant's disposition efforts (including information about any potential sublessees) to help ensure a sublease deal is not lost due to an extended approval period, a last-minute request for additional information, or refusal of consent by the landlord.

Although nearly every lease prohibits the tenant from subleasing without the prior written consent of the landlord, some exceptions to the landlord consent requirement that can often be negotiated into the prime lease include subleases to 'affiliates' of the tenant, corporate restructurings and subleases (or office sharing) of a portion of the premises with the tenant's customers or clients. In addition, although it is common for a lease to state that the landlord's consent to a sublease may not be unreasonably withheld, the lease often provides numerous situations in which the landlord's withholding of consent will be deemed reasonable. Instead, the lease should explicitly state that it will only be deemed reasonable for the landlord to withhold its consent in the event that the subtenant does not have the financial worth to perform its sublease obligations or its proposed use of the premises is not permitted under the terms of the prime lease.

Careful review of the prime lease may uncover less obvious requirements that might permit the landlord to withhold its consent to a sublease or impair subleasing efforts. For instance, many leases specify that a tenant may not sublease space to an existing tenant in the building or to any entity with which the landlord has negotiated a potential lease in the past 90 to 180 days. Often the best prospects are those tenants currently located in the building or office park and prospective tenants that have recently looked at space in the building. As long as the existing landlord does not have space of a similar size and term available in the building and is not actively negotiating with an existing or prospective tenant for similar space, the tenant should not be prohibited from making its premises available to these types of entities, and these provisions should be stricken or reworded in the lease. Similarly, some leases prohibit marketing a sublease at a rental rate that is less than the fair market value rent for the space or lower than the rent currently being offered by the landlord in the building. Given that sublease rents are often less than those of direct lease transactions, these types of provisions are unacceptable, and should never be agreed to. Attention should also be paid to limitations on a tenant's right to market its premises for sublease. It is not uncommon for a lease to prohibit a tenant from even marketing its space at a rental rate lower than that advertised by the landlord or even worse, stating any rental rate. Provisions such as these make subleasing efforts extremely difficult (if not impossible) as prospective tenants/brokers often search for potential space in databases using a rental rate ceiling. Therefore, if no rate is specified, your space will not be captured in a broker's search for viable options.

Many leases also provide favorable landlord rights ' such as landlord recapture rights and a right of the landlord to share in profits made by the tenant through its disposition activities ' should the tenant need to dispose of its premises. Any profit split should be based on the net profits of a sublease. Net profits should be defined as the difference in rent being paid under the sublease versus the prime lease, net of all brokerage commissions, free rent allowances and other costs and expenses incurred by the tenant in disposing of its space. A recapture right typically allows the landlord to respond to a sublease request by either terminating the lease with respect to the proposed sublet space or allowing the landlord to sign a lease directly with the prospect. If forced into accepting a recapture right, the most advantageous scenario for the tenant is one that includes a set time limit for the landlord to activate the right to recapture as well as a right that only applies to prospects of a significant size.

In addition, tenants should insist that the landlord exercise the recapture right well before the tenant spends time and money trying to locate a prospective subtenant. If the lease has a landlord recapture right, make sure that the landlord is charged with all costs associated with demising the recaptured space from the balance of the premises. These costs can be substantial as demising costs involve more than just the cost of drywall. They include the architect's cost in reviewing and documenting the proposed alterations for their impact on paths of egress, fire code and other related code issues. Also included are costs associated with the permitting process such as architectural and engineering plans and submissions for governmental approvals. Architectural and engineering plans can be fairly detailed especially where significant reconfiguration of the premises is required to turn a full floor user into a multi-tenant floor. Further, there are costs associated with rebalancing the HVAC system for any reconfigured space.

The inability to give a subtenant parking rights can be the death nell of a deal. Thus, tenants need to make sure that their lease allows them to assign a portion of their allotted parking permits to a subtenant. Moreover, if the tenant has downsized and is considering giving up some of its parking permits in an effort to cut costs, without a recall right, the tenant should carefully consider how the absence of parking may affect potential subleasing.

Marketing Space for Sublet

Once a determination is made to sublease space, and the provisions of the prime lease are reviewed with respect to the subleasing restrictions, the tenant must decide how to market its space.

A company may choose to market the space on its own rather than retain a real estate professional. Often this approach does not work because immediate and constant exposure in the market is a necessity, and organizations usually do not have someone in-house with the time and expertise to handle day- to-day sublease marketing activities. Thus, retaining a real estate professional to assist the company in subleasing excess space is extremely beneficial to tenants. It should be noted that prospective subtenants generally have a real estate professional represent them, and a real estate professional is not paid until a subtenant has been secured.

Companies should also speak to their architects to gain an understanding of how the space to be sublet might demise into smaller suites in light of applicable fire codes and other legal requirements. Be armed with answers to demising questions that a prospective subtenant may ask because delays in answering such questions may cost you a deal, especially in markets where options are plentiful.

The mindset every sublandlord should maintain in marketing excess space is one of flexibility. Although it is not realistic that a tenant can be flexible on all issues in marketing its space for sublease, there should be an effort made to address options associated with pricing, term, demising, and alterations. Sublease space competes not only with prime lease space, but also with other sublease space that may be offered at greatly reduced rental rates in the surrounding marketplace or even within the same building. Factors that help determine the price of sublease space include its existing or proposed layout, the length of the sublet term offered, the rents on comparable spaces in the market, and the overall appeal of the sublease space. Amenities and drawbacks such as available parking, window line, a presence directly off the elevator lobby, security, access to public transportation, the ability to alter the premises, or unusually high and transient type of traffic within the building (eg doctors' offices, call centers) may also significantly affect what a proposed subtenant is willing to pay.

In rare instances, the space may be priced at or above the existing rate the tenant is paying and still be considered competitive. If the original lease rate is well below market, if the transferable landlord concessions are substantial, or if the office space is in a particularly well-located and desirable building, this might be possible. However, in most cases the tenant must be prepared to discount its existing rental rate by 20% or more. To secure subtenants, tenants must price their sublet space aggressively. Remember, it is not worth haggling over a few dollars, because a deal today is generally more attractive than the next one that will be made, especially in markets where demand is low and your next deal could be many months away. In situations where the company does not want to lock-in today at a deeply discounted sublet rental rate (believing rates will increase in a few years), a short term sublease might be structured with extension options reset at then-existing market rates.

Typically, tenants are only able to sublet their space through the expiration of the initial lease term. Offering a short lease term may greatly reduce the value of the leasehold to a prospective subtenant, as most companies do not want to relocate their offices every few years. One of the most often-cited reasons prospects give for not subleasing space is the absence of 'term.' Marketing the space with an opportunity to extend the term through a direct deal with the landlord may, therefore, prove critical. The subtenant may find the combined or blended-down rate of the sublease and direct lease to be financially appealing when compared to a direct, long-term lease offered solely by the landlord. In addition, the tenant might be relieved of its leasehold obligation relative to the sublease space, if the subtenant and the terms negotiated appeal to the landlord. Thus, tenants looking to sublease should always approach their prime landlord about the potential of extending the term through a direct discussion with the subtenant and the prime landlord. If the tenant has a right to renew its lease, it should also consider offering the subtenant a renewal right predicated upon the tenant's renewing.

The state of the local real estate market and a tenant's business plans greatly influence how and if a sublease space should be demised and marketed. The tenant may decide that offering the sublet space in 'as-is' condition will recapture more rent at a reduced rental rate, as opposed to dividing the space and incurring demising and tenant improvement costs that will require higher sublease rents. As previously stated, costs to demise the space add up quickly. In addition, in any newly demised suite, you may need to replicate amenities (reception areas, pantries, workrooms and the like) in order to make the space functional for a new tenant. On the other hand, by demising the sublease space into smaller suites, the tenant may attract a wider audience of potential subtenants. If for example, demand for 10,000 square foot tenants is low, but there are a number of smaller tenants in the market, demising the tenant's space can be the catalyst to securing a subtenant. A tenant might also consider vacating its entire space and relocating its offices to an entirely new, albeit smaller, space if this increases the chance of subleasing the space, given the demand in the market and overall occupancy cost savings.

Tenants often require some improvements to the space to make it more functional or appealing. The economics of amortizing even a small amount of improvements over a short term, however, may not be justifiable. For example, using a 12% interest rate for tenant improvements that cost $10 per square foot (often the cost to paint, re-carpet and make minimal changes to the space), the cost to amortize those improvements over a 5-year term is 22 cents per square foot per month. This same $10 per square foot over a 20-month sublease term is 55 cents per square foot per month. In this case, the tenant may prefer to offer free rent, or a lower rental rate rather than fronting the improvement dollars. If the tenant can offer tenant improvement dollars because, for example, it may not have spent its tenant improvement allowance, the sublease deal will be more competitive. A tenant with available funds to spend might best be served by building out the space it desires to sublease to fit demand in the marketplace ' even space in shell condition so that it is ready for move-in. If a subtenant requires tenant improvement dollars to alter the subleased premises, the tenant should also approach the landlord because the landlord may be willing to front those funds today in exchange for a direct longer-term deal with the prospective subtenant. At a minimum, the space should be thoroughly cleaned and any physical damage, such as carpet stains, broken HVAC units, and punctured walls should be repaired prior to marketing the space for sublease. A subtenant's poor first impression of space that does not show well is very difficult to overcome.

Tenants can also sweeten the sublease deal by offering 'plug and play' space ' space that is ready for occupancy. Space that is fully furnished, with a phone system and all cabling in place often garners a higher rental rate as subtenants are saved both time and money. If the subtenant has the free use of tenant-owned furniture and equipment during the sublease term, the tenant should consider passing on to the subtenant any personal property taxes owed with respect to such furniture and equipment. In addition, any furniture or equipment provided or sold to a subtenant for its use during the term should be provided or sold only on an 'As-Is, Where-Is, With-All-Faults' basis.

Document Issues Not Addressed in the Prime Lease

Once a subtenant is procured and the general economic terms are agreed to, the tenant should ensure that all issues are properly documented in a sublease. However, in no event should the tenant haggle over sublease terms. Deals need to be closed quickly or they will be lost. Subtenants do not take kindly to a 20-page sublease agreement. To the extent possible, provisions addressed in the prime lease should be incorporated simply by reference in the sublease. Other issues that may not be adequately addressed in the prime lease, such as the sharing of services and utilities, alterations and restoration, subtenant security deposits and recognition agreements, should be provided for in the sublease.

Utilities

Services and utilities that are provided jointly to both the tenant's and subtenant's premises need to be agreed upon and allocated in advance of the sublease commencement date. The tenant should include language in the sublease permitting separate metering of the sublet space if the subtenant's usage of electricity or other utilities far exceeds the tenant's usage.

Additional building systems that may require further agreement include the joint use of telephone systems, CAT-5, T-1 or other Internet providing lines, roof rights (ie, satellite communications equipment) and inter-building cables. If the phone closets are located within the tenant's premises and not in the building core, nonexclusive access to the phone closet for the subtenant using its own phone system, must be provided for in the sublease.

Alterations

The subtenant's rights and obligations regarding alterations to the sublet space should conform to the tenant's long-term goals for use of the sublease space and be spelled out in the sublease. For example, the prime lease's provisions for approval of the subtenant's alterations and the subtenant's contractors should be incorporated by reference in the sublease but modified to address the tenant's concerns. Additionally, if the prime lease states that the landlord is entitled to construction management fees in connection with any alterations to the premises, such fees should be incorporated by reference into the sublease agreement. If the tenant is subject to restoration requirements under the prime lease, then it is important that the subtenant be required to return the subleased premises to its original condition prior to the sublease expiration date to avoid additional costs for the tenant in removing additional subtenant alterations. Even if the prime lease does not require restoration of alterations, the sublease should include a restoration requirement on the part of the subtenant for alterations that might make the space less functional for the tenant or other subtenants. The sublease term may end prior to expiration of the tenant's prime lease term as drafted or due to the subtenant's default, and the tenant may not be able to use the sublet space as it has been reconfigured.

Security Deposits

Due to smaller concession packages in sublease deals and the typical short-term nature of subleases, sublandlord's do not always heavily scrutinize the credit of subtenants. Today, with heftier concession packages and longer-term sublet deals, more scrutiny of a subtenant's credit should be undertaken, and a security deposit required. The amount of the deposit should be dependent upon a number of factors, including, the commonalities of the market and the concessions (brokerage commissions, free rent and tenant improvement allowances) being given to the subtenant. At a mini- mum, some deposit should be required to cover potential repair or restoration costs resulting from a subtenant's failure to return the sublet premises in the condition required by the sublease.

Prospective subtenants often state that they'd rather enter into a direct lease with a prime landlord than a sublease because they are concerned that they might be evicted or that their rent will increase dramatically should the tenant default. It is rare that the prime lease requires the landlord to recognize subtenants (and the terms of a to-be-determined sublease agreement) should the tenant default. A tenant can nevertheless request that the landlord include a recognition or non-disturbance clause in its consent to the sublease that would permit the sublease (under predefined parameters) to continue as a direct contractual relationship between the landlord and the subtenant in the event that the tenant defaults under the prime lease and the prime lease is terminated. This may provide the additional comfort a prospective subtenant needs to enter into a sublease. Of course, the credit-worthiness of a particular sublandlord will directly affect the importance of this issue to a subtenant.

Conclusion

In summary, tenants with excess space want to 'stop the bleeding' ' mitigate as much of their remaining leasehold obligation as possible. Absent a lease buy out, subleasing is the common course of action to achieve the tenant's mitigation goals. We recommend careful planning for exit strategies in a company's acquisition of space, flexible sublease marketing strategies and simple sublease documentation, so that these goals are easily and swiftly achieved.

Elizabeth K. Cooper is vice president and counsel and Jill A. Lache is an associate at The Staubach Company, a tenant representation firm, located in Washington, D.C.

State of the Market

The ensuing softening of the commercial real estate market fueled by massive corporate restructuring, downsizing and changes in geographic locations has led to a flood of sublease space being placed on the market. As recently reported in the National Real Estate Investor, there are 124 million square feet of office space being offered for sublet today, which equates to approximately 25% of total available office space nationwide. See Parke Chapman and Matt Valley, 'The Sublease Overhang: A 124 Million Square Foot Headache,' National Real Estate Investor (February, 2003). In order to mitigate the cost of leasing unused space, companies are subletting, or similarly, positioning their excess space so that a favorable lease termination fee or a lease buy out can be negotiated with the existing landlord. As tenant representatives, we are often retained by companies to assist with their disposition efforts. We recommend that the following subleasing strategies be considered for mitigating a company's remaining leasehold obligation effectively.

The Prime Lease ' Subleasing Considerations

It is important for tenants to consider potential 'exit strategies' when initially leasing space. Tenants generally lease space for an extended period of time, and forget that they may need or want to get out of the lease or sublease a portion of their premises prior to the expiration of their lease. When considering leasing office space, tenants should contemplate how easily the space can be demised and marketed for sublease. Further, tenants should consider whether one location, building or landlord would be more appealing to potential subtenants than another.

It is also important to negotiate into the lease document specifically crafted provisions that can and will make subleasing easier and less costly. Restrictions on subleasing are often overlooked during lease negotiations, and these restrictions can severely hamper a tenant's disposition efforts. Most leases require that the tenant provide the landlord notice of a proposed sublease and a 30- to 45-day window to approve any subleases. One should negotiate as short an approval period as possible, deeming the landlord's failure to respond as an approval of the sublease deal. A company should also keep its landlord well informed about the tenant's disposition efforts (including information about any potential sublessees) to help ensure a sublease deal is not lost due to an extended approval period, a last-minute request for additional information, or refusal of consent by the landlord.

Although nearly every lease prohibits the tenant from subleasing without the prior written consent of the landlord, some exceptions to the landlord consent requirement that can often be negotiated into the prime lease include subleases to 'affiliates' of the tenant, corporate restructurings and subleases (or office sharing) of a portion of the premises with the tenant's customers or clients. In addition, although it is common for a lease to state that the landlord's consent to a sublease may not be unreasonably withheld, the lease often provides numerous situations in which the landlord's withholding of consent will be deemed reasonable. Instead, the lease should explicitly state that it will only be deemed reasonable for the landlord to withhold its consent in the event that the subtenant does not have the financial worth to perform its sublease obligations or its proposed use of the premises is not permitted under the terms of the prime lease.

Careful review of the prime lease may uncover less obvious requirements that might permit the landlord to withhold its consent to a sublease or impair subleasing efforts. For instance, many leases specify that a tenant may not sublease space to an existing tenant in the building or to any entity with which the landlord has negotiated a potential lease in the past 90 to 180 days. Often the best prospects are those tenants currently located in the building or office park and prospective tenants that have recently looked at space in the building. As long as the existing landlord does not have space of a similar size and term available in the building and is not actively negotiating with an existing or prospective tenant for similar space, the tenant should not be prohibited from making its premises available to these types of entities, and these provisions should be stricken or reworded in the lease. Similarly, some leases prohibit marketing a sublease at a rental rate that is less than the fair market value rent for the space or lower than the rent currently being offered by the landlord in the building. Given that sublease rents are often less than those of direct lease transactions, these types of provisions are unacceptable, and should never be agreed to. Attention should also be paid to limitations on a tenant's right to market its premises for sublease. It is not uncommon for a lease to prohibit a tenant from even marketing its space at a rental rate lower than that advertised by the landlord or even worse, stating any rental rate. Provisions such as these make subleasing efforts extremely difficult (if not impossible) as prospective tenants/brokers often search for potential space in databases using a rental rate ceiling. Therefore, if no rate is specified, your space will not be captured in a broker's search for viable options.

Many leases also provide favorable landlord rights ' such as landlord recapture rights and a right of the landlord to share in profits made by the tenant through its disposition activities ' should the tenant need to dispose of its premises. Any profit split should be based on the net profits of a sublease. Net profits should be defined as the difference in rent being paid under the sublease versus the prime lease, net of all brokerage commissions, free rent allowances and other costs and expenses incurred by the tenant in disposing of its space. A recapture right typically allows the landlord to respond to a sublease request by either terminating the lease with respect to the proposed sublet space or allowing the landlord to sign a lease directly with the prospect. If forced into accepting a recapture right, the most advantageous scenario for the tenant is one that includes a set time limit for the landlord to activate the right to recapture as well as a right that only applies to prospects of a significant size.

In addition, tenants should insist that the landlord exercise the recapture right well before the tenant spends time and money trying to locate a prospective subtenant. If the lease has a landlord recapture right, make sure that the landlord is charged with all costs associated with demising the recaptured space from the balance of the premises. These costs can be substantial as demising costs involve more than just the cost of drywall. They include the architect's cost in reviewing and documenting the proposed alterations for their impact on paths of egress, fire code and other related code issues. Also included are costs associated with the permitting process such as architectural and engineering plans and submissions for governmental approvals. Architectural and engineering plans can be fairly detailed especially where significant reconfiguration of the premises is required to turn a full floor user into a multi-tenant floor. Further, there are costs associated with rebalancing the HVAC system for any reconfigured space.

The inability to give a subtenant parking rights can be the death nell of a deal. Thus, tenants need to make sure that their lease allows them to assign a portion of their allotted parking permits to a subtenant. Moreover, if the tenant has downsized and is considering giving up some of its parking permits in an effort to cut costs, without a recall right, the tenant should carefully consider how the absence of parking may affect potential subleasing.

Marketing Space for Sublet

Once a determination is made to sublease space, and the provisions of the prime lease are reviewed with respect to the subleasing restrictions, the tenant must decide how to market its space.

A company may choose to market the space on its own rather than retain a real estate professional. Often this approach does not work because immediate and constant exposure in the market is a necessity, and organizations usually do not have someone in-house with the time and expertise to handle day- to-day sublease marketing activities. Thus, retaining a real estate professional to assist the company in subleasing excess space is extremely beneficial to tenants. It should be noted that prospective subtenants generally have a real estate professional represent them, and a real estate professional is not paid until a subtenant has been secured.

Companies should also speak to their architects to gain an understanding of how the space to be sublet might demise into smaller suites in light of applicable fire codes and other legal requirements. Be armed with answers to demising questions that a prospective subtenant may ask because delays in answering such questions may cost you a deal, especially in markets where options are plentiful.

The mindset every sublandlord should maintain in marketing excess space is one of flexibility. Although it is not realistic that a tenant can be flexible on all issues in marketing its space for sublease, there should be an effort made to address options associated with pricing, term, demising, and alterations. Sublease space competes not only with prime lease space, but also with other sublease space that may be offered at greatly reduced rental rates in the surrounding marketplace or even within the same building. Factors that help determine the price of sublease space include its existing or proposed layout, the length of the sublet term offered, the rents on comparable spaces in the market, and the overall appeal of the sublease space. Amenities and drawbacks such as available parking, window line, a presence directly off the elevator lobby, security, access to public transportation, the ability to alter the premises, or unusually high and transient type of traffic within the building (eg doctors' offices, call centers) may also significantly affect what a proposed subtenant is willing to pay.

In rare instances, the space may be priced at or above the existing rate the tenant is paying and still be considered competitive. If the original lease rate is well below market, if the transferable landlord concessions are substantial, or if the office space is in a particularly well-located and desirable building, this might be possible. However, in most cases the tenant must be prepared to discount its existing rental rate by 20% or more. To secure subtenants, tenants must price their sublet space aggressively. Remember, it is not worth haggling over a few dollars, because a deal today is generally more attractive than the next one that will be made, especially in markets where demand is low and your next deal could be many months away. In situations where the company does not want to lock-in today at a deeply discounted sublet rental rate (believing rates will increase in a few years), a short term sublease might be structured with extension options reset at then-existing market rates.

Typically, tenants are only able to sublet their space through the expiration of the initial lease term. Offering a short lease term may greatly reduce the value of the leasehold to a prospective subtenant, as most companies do not want to relocate their offices every few years. One of the most often-cited reasons prospects give for not subleasing space is the absence of 'term.' Marketing the space with an opportunity to extend the term through a direct deal with the landlord may, therefore, prove critical. The subtenant may find the combined or blended-down rate of the sublease and direct lease to be financially appealing when compared to a direct, long-term lease offered solely by the landlord. In addition, the tenant might be relieved of its leasehold obligation relative to the sublease space, if the subtenant and the terms negotiated appeal to the landlord. Thus, tenants looking to sublease should always approach their prime landlord about the potential of extending the term through a direct discussion with the subtenant and the prime landlord. If the tenant has a right to renew its lease, it should also consider offering the subtenant a renewal right predicated upon the tenant's renewing.

The state of the local real estate market and a tenant's business plans greatly influence how and if a sublease space should be demised and marketed. The tenant may decide that offering the sublet space in 'as-is' condition will recapture more rent at a reduced rental rate, as opposed to dividing the space and incurring demising and tenant improvement costs that will require higher sublease rents. As previously stated, costs to demise the space add up quickly. In addition, in any newly demised suite, you may need to replicate amenities (reception areas, pantries, workrooms and the like) in order to make the space functional for a new tenant. On the other hand, by demising the sublease space into smaller suites, the tenant may attract a wider audience of potential subtenants. If for example, demand for 10,000 square foot tenants is low, but there are a number of smaller tenants in the market, demising the tenant's space can be the catalyst to securing a subtenant. A tenant might also consider vacating its entire space and relocating its offices to an entirely new, albeit smaller, space if this increases the chance of subleasing the space, given the demand in the market and overall occupancy cost savings.

Tenants often require some improvements to the space to make it more functional or appealing. The economics of amortizing even a small amount of improvements over a short term, however, may not be justifiable. For example, using a 12% interest rate for tenant improvements that cost $10 per square foot (often the cost to paint, re-carpet and make minimal changes to the space), the cost to amortize those improvements over a 5-year term is 22 cents per square foot per month. This same $10 per square foot over a 20-month sublease term is 55 cents per square foot per month. In this case, the tenant may prefer to offer free rent, or a lower rental rate rather than fronting the improvement dollars. If the tenant can offer tenant improvement dollars because, for example, it may not have spent its tenant improvement allowance, the sublease deal will be more competitive. A tenant with available funds to spend might best be served by building out the space it desires to sublease to fit demand in the marketplace ' even space in shell condition so that it is ready for move-in. If a subtenant requires tenant improvement dollars to alter the subleased premises, the tenant should also approach the landlord because the landlord may be willing to front those funds today in exchange for a direct longer-term deal with the prospective subtenant. At a minimum, the space should be thoroughly cleaned and any physical damage, such as carpet stains, broken HVAC units, and punctured walls should be repaired prior to marketing the space for sublease. A subtenant's poor first impression of space that does not show well is very difficult to overcome.

Tenants can also sweeten the sublease deal by offering 'plug and play' space ' space that is ready for occupancy. Space that is fully furnished, with a phone system and all cabling in place often garners a higher rental rate as subtenants are saved both time and money. If the subtenant has the free use of tenant-owned furniture and equipment during the sublease term, the tenant should consider passing on to the subtenant any personal property taxes owed with respect to such furniture and equipment. In addition, any furniture or equipment provided or sold to a subtenant for its use during the term should be provided or sold only on an 'As-Is, Where-Is, With-All-Faults' basis.

Document Issues Not Addressed in the Prime Lease

Once a subtenant is procured and the general economic terms are agreed to, the tenant should ensure that all issues are properly documented in a sublease. However, in no event should the tenant haggle over sublease terms. Deals need to be closed quickly or they will be lost. Subtenants do not take kindly to a 20-page sublease agreement. To the extent possible, provisions addressed in the prime lease should be incorporated simply by reference in the sublease. Other issues that may not be adequately addressed in the prime lease, such as the sharing of services and utilities, alterations and restoration, subtenant security deposits and recognition agreements, should be provided for in the sublease.

Utilities

Services and utilities that are provided jointly to both the tenant's and subtenant's premises need to be agreed upon and allocated in advance of the sublease commencement date. The tenant should include language in the sublease permitting separate metering of the sublet space if the subtenant's usage of electricity or other utilities far exceeds the tenant's usage.

Additional building systems that may require further agreement include the joint use of telephone systems, CAT-5, T-1 or other Internet providing lines, roof rights (ie, satellite communications equipment) and inter-building cables. If the phone closets are located within the tenant's premises and not in the building core, nonexclusive access to the phone closet for the subtenant using its own phone system, must be provided for in the sublease.

Alterations

The subtenant's rights and obligations regarding alterations to the sublet space should conform to the tenant's long-term goals for use of the sublease space and be spelled out in the sublease. For example, the prime lease's provisions for approval of the subtenant's alterations and the subtenant's contractors should be incorporated by reference in the sublease but modified to address the tenant's concerns. Additionally, if the prime lease states that the landlord is entitled to construction management fees in connection with any alterations to the premises, such fees should be incorporated by reference into the sublease agreement. If the tenant is subject to restoration requirements under the prime lease, then it is important that the subtenant be required to return the subleased premises to its original condition prior to the sublease expiration date to avoid additional costs for the tenant in removing additional subtenant alterations. Even if the prime lease does not require restoration of alterations, the sublease should include a restoration requirement on the part of the subtenant for alterations that might make the space less functional for the tenant or other subtenants. The sublease term may end prior to expiration of the tenant's prime lease term as drafted or due to the subtenant's default, and the tenant may not be able to use the sublet space as it has been reconfigured.

Security Deposits

Due to smaller concession packages in sublease deals and the typical short-term nature of subleases, sublandlord's do not always heavily scrutinize the credit of subtenants. Today, with heftier concession packages and longer-term sublet deals, more scrutiny of a subtenant's credit should be undertaken, and a security deposit required. The amount of the deposit should be dependent upon a number of factors, including, the commonalities of the market and the concessions (brokerage commissions, free rent and tenant improvement allowances) being given to the subtenant. At a mini- mum, some deposit should be required to cover potential repair or restoration costs resulting from a subtenant's failure to return the sublet premises in the condition required by the sublease.

Prospective subtenants often state that they'd rather enter into a direct lease with a prime landlord than a sublease because they are concerned that they might be evicted or that their rent will increase dramatically should the tenant default. It is rare that the prime lease requires the landlord to recognize subtenants (and the terms of a to-be-determined sublease agreement) should the tenant default. A tenant can nevertheless request that the landlord include a recognition or non-disturbance clause in its consent to the sublease that would permit the sublease (under predefined parameters) to continue as a direct contractual relationship between the landlord and the subtenant in the event that the tenant defaults under the prime lease and the prime lease is terminated. This may provide the additional comfort a prospective subtenant needs to enter into a sublease. Of course, the credit-worthiness of a particular sublandlord will directly affect the importance of this issue to a subtenant.

Conclusion

In summary, tenants with excess space want to 'stop the bleeding' ' mitigate as much of their remaining leasehold obligation as possible. Absent a lease buy out, subleasing is the common course of action to achieve the tenant's mitigation goals. We recommend careful planning for exit strategies in a company's acquisition of space, flexible sublease marketing strategies and simple sublease documentation, so that these goals are easily and swiftly achieved.

Elizabeth K. Cooper is vice president and counsel and Jill A. Lache is an associate at The Staubach Company, a tenant representation firm, located in Washington, D.C.