Winning the Space Race:
Dealing with Excess Leased Space

Whenever economic conditions are in decline, as has recently been the case in the United States, businesses look for ways to reduce overhead costs and increase their bottom lines. The resulting personnel layoffs are usually widely reported, but a reevaluation of a company's real estate portfolio can also be an important part of this process.

When surplus space is owned outright, the decision of whether to sell or lease is driven primarily by business and market conditions. Excess leased space, however, adds an additional layer of legal consideration. The cost-conscious executive should consider the following issues in dealing with excess leased space:

• How much time is left in the term of the lease? A shorter term (generally less than 5 years) will be less attractive to a potential subtenant. Consider offering to buy out leases that have a remaining term of only a year or two. A "right of recapture" in the lease may be an indication that a landlord is willing to consider this.

• What conditions does the lease place on assignments and subleases? Some leases permit unrestricted transfers, but most give the landlord approval rights with some degree of control over the choice of subtenant.

• Look internally. Is there another division of the company that is expanding or consolidating forces, which could make use of the available space?

• Does the lease allow the space to be carved up into two or more smaller parcels? Particularly with large spaces, the ability to sublease less than the whole can provide the flexibility necessary to attract subtenants.

• How does the lease allow the space to be used? Many leases contain very narrow usage clauses (e.g., "operation of a travel agency") which can severely limit assignment and sublease possibilities. Also, will the subtenant be able to put up its standard signage?

• Is the sublandlord required to remain liable for all lease obligations? Because of lower demand in the market, potential subtenants may be less credit worthy than the original tenant (sublessor). Therefore, most landlords will not be willing to release the original tenant completely.

• Is the sublandlord willing to offer tenant improvement dollars or other inducements? Usually, a company that is downsizing will not be interested in investing additional capital in a lease. However, a small up front expenditure could close the deal on a sublease that will save much more in the long run.

• Be aggressive and accept that recouping some costs is better than none. Focus on non-monetary rewards, such as minimizing liability.

• Don't wait until the crunch comes. A regular review of all components of a real estate portfolio can avoid costly mistakes and delays in a down market.

While many landlords would rather work with a tenant than allow leased space to go dark, others expect to enforce each and every term of the lease. An attorney can assist in evaluating the situation and mapping out the best strategy.
  

For further information on this topic, please contact Beth Tiggelaar at beth.tiggelaar@strasburger.com.

     
STRASBURGER & PRICE, LLP  •  DISCLAIMER
Articles contained within this newsletter provide information on general legal issues and are not intended to provide advice on any specific legal matter. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel.