Sublease agreements between small business owners are a great way to save on overhead costs, but can be a bit of a headache to setup between two driven entrepreneurs. Both parties need to be able to come to an agreement that allows them to share costs in accordance to both usage, risk, and the maintenance of control over the property itself. Combined then with the cost-conscious nature of small business, haggling over how it is that a split lease on a shared property can be an effort that is more trying than it needs to be.
In order to help small business owners understand the basics of what they’ll be looking at when building up a similar kind of arrangement, this article provides a basic framework for how it is that a shared work space can be sublet between businesses with as little friction as possible.
The first aspect of a commercial sublease that a group of entrepreneurs should revolves around the respective abilities of both companies to bear risk. The reason why this article generally recommends looking at a sublease arrangement as opposed to a shared lease is because of the way in which there is usually one company in these arrangements that is already a bit larger than the other, and is therefore better able to bear the terms of the lease with the support of the sub-letter.
By having an individual as a main tenant that subleases the space out to a second company, there exists an agreement with the flexibility to accommodate the momentum of the larger company as it develops into its own space, while making it easier for the smaller entrepreneur to back out in the event that they need to pursue more space, or close down shop. While this might seem like a somewhat trivial goal to meet, it is a surprisingly prudent type of agreement to come to, so long as the purpose of flexibility is maintained throughout the agreement.
In order to build a flexible subletting agreement, we need to start with a fixed baseline from which to build upon. This fixed aspect of the agreement will pertain to the payments of both agreed-upon rent from the subleaser to the main tenant, and includes a discussion of how it is that variable aspects of the lease are worked into the agreement itself. The way to reach such an arrangement is to begin by establishing the respective days in which each tenant will be using the property. For example, if the split is being made so that party 1 uses 3/7 days, that tenant will pay 3/7th of the explicit rent.
From there, we use this usage base as the same break-down for the actual variable costs paid. This means that party 1 will therefore pay 3/7th of the variable utilities associated with the property. That being said, because of the way in which utilities and replacement office supplies are arguably immaterial overhead, companies will sometimes agree to simply pay fixed amounts into an ‘overhead expense’ account, and therefore not worry about the recurring costs over time.
After determining the fixed-baseline costs to be applied to the subletting agreement, business owners can start to look at the dynamic aspects of the agreement that really bring value to both parties in question. Firstly, we can start to look at how it is that weekend usage comes into play for both tenants. If weekend usage is on the table for the businesses involved (for small businesses it usually is), the trick to sorting out this sort of arrangement is to determine which company will require weekend usage on the most consistent basis.
This individual will usually be the actual lease-holder of the property, and will own the rights to weekend usage by default. From there, the sub-letter is in a position to ‘purchase’ weekend usage against the actual lease-holder’s first-right-of-refusal. This means that, provided that the sub-letter provides notice, each individual is allowed flexible access to weekends in accordance to their needs, but there are no grounds for argument between the two parties. Both have access to the weekends when they need them, but the sub-letter doesn’t feel like they are paying for time that they do not actually use because of their smaller size.
In combining all of this together, the trick is to take a step back and look at how it is that an entire agreement comes together, as a function of the fixed rental costs, overhead costs, and flexible usage aspects of the property, so as to ensure that both parties are seeing their business needs met to a reasonable degree of accommodation.