Subleasing the warehouse space you don't need

What a sublease is

A sublease is a lease granted by a tenant. You keep your lease with the landlord, usually called the head lease, and grant a subtenant the right to occupy some or all of your premises for a period that ends before your own term does. The subtenant pays you; you keep paying the landlord.

It is different from an assignment, where you transfer your whole remaining lease to someone else. Assignment is often the cleaner exit when you want out entirely. Subleasing suits you when you want to keep control of the space, keep part of it, or come back to it later. For how this looks from the other side, see subleasing as a way to get space.

When subleasing makes sense

Subleasing works when you have a real surplus, enough term left to attract a user, and space that can stand on its own. Typical triggers:

• Your headcount, inventory or volume has dropped and you don't expect it back before the lease ends.
• You've moved some operations to another site but can't exit the lease early.
• You took extra room for growth that hasn't come yet, and want the cost covered in the meantime.
• You'll need part of the building back later, and want a subtenancy that ends on a date that suits you.

Separating the space

A subtenant needs somewhere it can work without walking through your operation. Before you market anything, decide exactly what you're offering and mark it on a floor plan: the area, its own man door and, ideally, its own overhead door or shared dock time written into the deal. Allocate washrooms, parking and yard or trailer space clearly, and decide whether utilities will be sub-metered or split by a formula both sides accept.

Physical separation can be a demising wall, fencing or a cage partition, depending on security and fire requirements. A demising wall is construction that commonly needs a building permit, and between tenancies it may need to be a rated fire separation. Most head leases also require landlord approval for alterations. The rent-out planner shows how much of your building you could offer after your own needs, and how it might be split.

The clauses that shape the deal

Most commercial leases require the landlord's consent before you sublet. Read these parts of your lease before you talk to a single prospect:

• The consent test. Many leases say consent is not to be unreasonably withheld; some give the landlord more discretion, and some prohibit subletting outright.
• Recapture. Some leases let the landlord answer your request by taking the space back, ending your lease for that area, instead of consenting.
• Profit-sharing. If the subtenant pays more than you do for the same space, the lease may require you to pay the landlord a share, or all, of the difference.
• Costs. You're commonly required to pay the landlord's reasonable costs of reviewing the request.
• Use and alterations. The subtenant's business must fit your permitted-use clause, and any work needs approval.

Risks and how to manage them

The biggest risk is simple: you usually stay liable to the landlord for the whole lease, subtenant or not. If the subtenant stops paying or damages the space, the landlord still looks to you. Manage it this way:

• Screen the subtenant as a landlord would: financial statements, time in business and references. See how to screen a warehouse tenant.
• Take a security deposit, letter of credit or guarantee sized to the risk.
• Make the sublease back-to-back, so the subtenant takes on the head-lease obligations for its area and you aren't squeezed between the two.
• Require commercial general liability and contents insurance, naming you and your landlord as additional insureds.
• End the sublease before your own lease ends. A subtenancy can't outlast your term, and one that runs for the whole remainder can be treated as an assignment; ask your lawyer how to set the date.
• Confirm the subtenant's use fits the land-use district. A new use may need a development permit, and the subtenant may need its own municipal business licence.
• Photograph and record the condition of the space at handover, so restoration at the end isn't a dispute.

What drives what you can charge

The same things that drive any warehouse rent apply, plus a few that are particular to subleases. Time left matters most: a short remaining term narrows your market to users who want flexibility, while a longer one competes with direct space. Fit and condition count: space that's already racked, lit and separated is worth more to a user than bare area it must build out. Shared access to docks, yard or washrooms makes the space less attractive than a self-contained bay.

Decide whether you'll quote an all-in figure that covers the subtenant's share of operating costs and property tax, or pass those through the way your own net lease does. Subleases are often priced to move, because recovering part of your cost beats recovering none of it. To turn a quote into a monthly number, use the monthly cost calculator.

Next steps

Work through it in this order:

1. Read your lease: consent, recapture, profit-sharing, use and alteration clauses.
2. Measure and plan the area you can give up, including access, washrooms and utilities.
3. Find out whether a formal request triggers recapture, and time your request accordingly.
4. Market the space through a brokerage that represents owners; in Alberta, brokerage services are regulated by RECA.
5. Agree terms with a subtenant, conditional on landlord consent.
6. Sign the sublease and consent agreement, collect deposit and insurance, and hand over.

Before you sublease

• Have I read the subletting, recapture and profit-sharing clauses in my lease?
• How long is left on my term, and when must the sublease end?
• Can the space be separated with its own access, washroom and utilities?
• Will any wall or alteration need landlord approval or a building permit?
• Does the subtenant's use fit my permitted-use clause and the land-use district?
• Have I reviewed the subtenant's financial statements and references?
• What deposit, guarantee and insurance will I require?
• Who pays the landlord's costs of reviewing the request?
• Would a surrender or an assignment be simpler than a sublease?