When the occupancy cost-to-sales ratio of a location is out of balance, the site management team is typically first to land under the microscope. When there are no obvious management issues and last-ditch efforts to drive revenue have failed, it may be time to accept the fact that even the most successful locations can suffer from:
- Shifting demographics
- Changing traffic patterns
- Increased competition
- Economic decline
If the only logical solution is to close the location, the next order of business is to appeal to the landlord. If there are no provisions that allow for early lease termination, and other potential tenants are not lining up to take the space, the tenant could be stuck paying rent on an empty building.
If you find yourself with empty locations, see if the lease language includes assignment and/or subleasing options. Legally these are two very different strategies, but with written consent (when required) from the landlord, both help tenants minimize the financial burden. But before going down that path, carefully consider the pros and cons of each.
- Assignment – When assigning a lease to a new tenant (assignee), the original tenant (assignor) transfers the legal rights of the property and usually cannot return to the location. In most cases, the assignee will be held to the same terms of the original lease and is directly accountable to the landlord, releasing the original tenant from future obligations. However, if the landlord does not release the assignor from the lease, he or she will remain liable for the actions of the assignee.
- Subleasing – In a sublease, the original tenant (sublandlord) retains his or her relationship with the landlord, but transfers part or all of the usage rights to the new tenant (subtenant). The sublandlord becomes responsible for landlord duties like collecting rent and maintaining the property as per the original lease agreement. This arrangement can be a huge cost savings. However, it also can add a substantial workload and financial liability, especially if damages and/or violations occur on the premises.
When considering whether assigning or subleasing underperforming locations is the right strategy, first consult the lease language to determine whether it’s a viable option and if there are any restrictions regarding uses. It’s also critical to work with an experienced real estate advisor with established networks to identify and qualify the most appropriate entity to assume assignment or subleasing responsibilities—while ensuring that your rights are protected under the new arrangement.
For information about how the Property Works Advisory Group can help with your assignment and subleasing projects, schedule a time to meet with us today.