Aug

Subletting excess office space – could this be the future, post Covid?

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One leading Belfast IT firm has just sublet its office space in the city as home working or hybrid working has taken hold in the company, and this looks like outlasting the Covid pandemic.

Liberty IT in Belfast has bitten the bullet on the issue and decided to lease its excess space in response to what it has termed the ‘new normal’, that is having most of its staff settling in to the hybrid way of working.

Reducing costs

IT work of course lends itself to this new mode of work, and the same won’t apply to every organisation. But if the trend really is here to stay there could be a fair bit of excess space in city offices and there will be an opportunity for companies to reduce their property costs by sub-letting.

Liberty is one of Belfast’s oldest-established IT or “tech” firms. Even as the guidance to work from home wherever possible has been lifted, the company has taken the decision to sublet over 9,000 square feet of its city headquarters building, Adelaide Exchange.

Is subletting a viable option for unwanted office space?

As yet there is no consensus view, or a definitive roadmap, as to whether businesses will be inviting or even demanding that employees, to return to their work places full time. The indications are though, most businesses of a certain type, where employees are able to work productively and flexibly, that is at home or on the move, then some form of hybrid working will become the norm and existing space will become surplus.

With the current economic situation as it is, when inflation has take off and costs are rising all round, businesses are seriously looking at ways to reduce their costs. One obvious saving world be to reduce a large slice of overhead – their property costs.

After salaries, property costs are usually a business’s biggest expense. During Covid, many businesses had to invest heavily in the IT infrastructure necessary to allow home working, so a saving on their rent payments would be one big way to off-set those costs going forward.

Subletting is one solution

But subletting is not without its difficulties. There are legal implications for both tenant as well as their landlord, and there may be a need to physically re-configure part of the building, from simply partitioning off work-floors and access ways, to some more major structural changes.

Companies that are commercial tenants with excess space are likely to be tied into a lease which may or may not have provision for subletting. But what options does a commercial tenant have if they find themselves tied into a lease and paying rent for offices that are now larger than they need?

Getting sound advice

Whether the lease prohibits subletting or not, the starting point should be discussions with the landlord, and both sets of solicitors – transparency is paramount. Following that, advice from local commercial agents should be sought to find out if there is the likely demand for the space, and how they would go about marketing it.

The legal and practical implications

The usual arrangement under subletting is that at new tenant would be found to occupy a suitable portion of the building with the original tenant still responsible to the head landlord to fulfil the lease obligations, including the rent payments and service charges. The tenant becomes landlord to the sub-tenants, charging a rent and apportioning the service charges accordingly.

It is almost certain the head landlord will have to give consent to the new arrangement and will want his or her lawyers to sanction the underlease. The original tenants will still carry their obligations under the repairing and maintenance clauses for the whole building, so it will be in their own interest to tie up the legals to protect themselves against the actions of the subtenants.

Subletting is a way of using excess space to save costs while allowing the business to stay in its existing premises.

If a tenant is not concerned about staying in the existing premises, and especially if the lease, or landlord prevents a sublet, that the tenant may consider triggering a break clause, if one is near, assigning the whole lease to another tenant, or trying to negotiate a surrender of the lease with the landlord. The latter course would usually entail paying substantial compensation to the landlord for the remaining income stream – the rent payments – being forgone.

However, a tenant could increase his chances of obtaining a lease surrender if he were to offer up a suitable tenant willing to take over. Covenant strength and length of lease commitment are the all important factors in a commercial letting, so a new attractive covenant and long lease may just swing it with the landlord.

A refurb opportunity

A change of tenant could well be an opportunity for refurbishment. There are looming obligations to be met for the new energy efficiency (MEES) standards. And a modern office building many well benefit from, and be made more marketable, if it is upgraded for heating, cooling, ventilation and IT infrastructure, as well as an optimised configuration for post Covid working.

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