Over the course of the pandemic...
Many office-based organizations have sought to save money by exploring subleasing as an option. With the return to work expected to be a hybrid mix of working from home and office, commercial office tenants don’t expect to need the same amount of space to support their staff. As a result, Ottawa (like most cities) has seen a historic boom in its subleasing market; a trend that is likely on the rise.
As far as commercial office leasing is concerned, space is leased for a certain duration. When that time is coming to an end, a tenant generally has two choices: negotiate a renewal or move somewhere else. However, if the tenant has an excessive space (which in COVID-19 times is basically everyone), they may want to consider offering some or all of their space to a subtenant.
For this reason, Real Strategy reached out to Vanessa Carment, Associate Lawyer at Ottawa-based law firm Soloway Wright LLP.Vanessa is a member of Soloway Wright’s Real Estate and Development, Commercial Leasing, and Condominium Law groups.
With respect to commercial leasing, Vanessa does work with both landlords and tenants, including drafting, reviewing, and interpreting lease provisions. Given her array of knowledge and practice, we caught up with Vanessa to gain deeper insight into how she advises clients and to discuss some basic strategies for subletting excess space in a high vacancy market.
Key points to consider surrounding subleases
One of the joys of commercial leasing is that there is flexibility and room for what the provisions can say which leads to varying levels of complexity. As a tenant, you’ll need to make sure you’re able to sublet and then explore the terms and conditions that are required of you.
These requirements will help guide and specify what is allowed and what’s not allowed when it comes to a potential sublessee. There’s no point in looking for a tenant that’s not going to be acceptable to the landlord. One of the most basic and overlooked hurdles to subletting is getting the landlord’s consent… it’s not always automatic.
Vanessa shared with us how she’s seen leases where it wasn’t required to get landlord consent but that this is highly unusual and not recommended for landlords. Subletting clauses are getting a renewed focus in the current commercial leasing landscape and you don’t want to bank on benevolence. You should be educated and prepared for certain restrictions.
Landlord, mortgagee, guarantor, and ground lessor consent are all items that can be required before a tenant is able to pursue subletting space.
“Depending on the structure of the commercial property itself, there can be layers of consent that are required in order to sublet. Some subleases will specify that consent can be unreasonably withheld, in which case the landlord is entitled to withhold consent for basically any reason.” — Vanessa Carment (Associate Lawyer, Soloway Wright LLP)
When you’re negotiating, you need to be aware of all these possibilities because it’s going to be something that is harder to change down the line. The more sophisticated the landlord, the more restrictions there may be depending on the nature of the type of building.
For example, malls and strip malls or building types where there are lots of moving parts put a lot of consideration into their tenant mix. In those cases, you’ll probably see more complex provisions versus a standalone building that the person’s renting out to a single tenant.
Part of getting the required consent and buy-in is meeting financial and other landlord requirements which can include:
- The tenant looking to dispose of space can’t be behind on their rent, or otherwise in default at the time of the request
- Proof that the potential sublessee has made a certain amount of revenue in the past two years
- Permitted use of space meaning that subtenants might have to fall into a certain commercial category to ensure that the landlord / commercial property owners tenant mix stays similar
- The inability for subtenants to adjust, renovate, or otherwise make major changes to the space
It’s also important for tenants to note that there are cases where a landlord is entitled to trigger a termination if the tenant asks for consent. These types of cases can actually benefit tenants since it might be beneficial for them if they want to get out of their lease full stop (if they are struggling for example).
There’s no guarantee that would happen and the same clause is not desirable if the tenant is trying to sublet out a section of their space. So the moral of the story is to recognize the importance of the negotiation stage and make sure you are aware of what can and can’t be done.
In part two, we’ll break down the difference between assignments, sublets, and licensing as well as negotiating subleases and provisions in the current climate.
Contact Real Strategy Advisors today so we can discuss your organization’s back-to-work strategy and how to take advantage of this historic market opportunity.
Soloway Wright is a regional law firm with offices in Ottawa and Kingston. The law firm offers a dynamic blend of knowledge and experience to clients requiring assistance with Real Estate, Business, Commercial Litigation and Leasing, Personal Injury, Medical Malpractice, Planning and Land Development, Employment and Labour, and Estate Planning and Administration law matters.