Office Space Disposition Options

Office Space Disposition Options

Presented By Mark Rauch

The main goal to disposing of space is to reduce the remaining leasehold obligation. Many times this goal gets side-tracked in the process. Issues such as insisting on current "market rents", focusing in on regaining the total remaining value of the leasehold obligation or being tied to the original costs of the tenant improvements will most assuredly prolong or kill the true goal of regaining a portion of the rent.

OPTIONS: SUBLEASE, BUY-OUT, WRITE-OFF OR RECAPTURE

SUBLEASE: The tenant's representative identifies and negotiates sublease with a prospective sublessee. The tenant's representative then approaches the Landlord.

A sublease involves three parties: Tenant-Sublessee-Owner. It is not unusual for the tenant and sublessee to reach agreement, but landlord does not approve, based on various issues including the prospect's financial stability, years in business, etc., preventing a successful sublease transaction. It is imperative to have an open dialogue with the Landlord to identify his/her goals, objectives and reservations prior to beginning the process. Also, the sublessee must agree to the terms and conditions in the primary lease. Rights such as parking, expansion, extension, subleasing are personal to the Tenant and usually not transferable. Identify the important items at the beginning of the process with the sublessee, then immediately discuss the items with the Landlord. It is important that all parties are fully involved from out of the gate.

An assignment would be another option. While assignments and subleases are both means to achieve substantially similar ends, they do yield different legal and business results. The differences will be the subject of a future article

BUY-OUT. From the Tenant's standpoint, this is the cleanest option. In many cases the Landlord will require that a creditworthy replacement tenant is lined up. A cash settlement is negotiated between the Tenant and Landlord that releases the Tenant from all remaining leasehold obligations. The Tenant should try to negotiate a net present value settlement although it is not unusual for the Landlord to request the total remaining leasehold obligation be paid up front.

WRITE-OFF. In certain instances, the Tenant will opt to continue to pay the rent on the vacant space and not attempt any of the other alternatives. This might happen if the subject space is small, sublease rent would not offset the cost to retrofit the space or there is little lease term remaining.

RECAPTURE. It is usually a good idea to negotiate any recapture rights out of the original Master Lease document. Recapture rights enable the Landlord to take the space back under certain conditions. The Landlord can aggressively market the subject space with the objective of locating a longer term tenant willing to pay market rent. In that case, the Landlord would have the right to terminate the existing leasehold and sign directly with the prospect.. The potential Subtenants could spend thousands in attorney's fees and months negotiating a sublease only to then wait an additional 45 days for the Landloord to decide if he/she is going to recapture, and than have the Landlord recapture! If the Landlord recaptures, thay may be stuck with doing a deal at a much higher rent than they planned, or they may have to walk away from the deal. The Landlord can aggressively market the subject space with the objective of locating a longer term Tenant willing to pay market rent. In that case, the Landlord would have the right to terminate the exiisting leasehold and sign directly with the prospect.

Nothing contained herein is to be considered legal advice. Always seek legal advice when evaluating any legal document.