Five Things to Consider Before You Sublet Office Space
As lawyers embrace remote work and resist returning to the office full time, many law firms wonder what to do with their empty offices.
As of early April 2022, the average office population in major U.S. metropolitan areas remained at 43%. While that’s up from an all-time low of 14.6% at the height of the COVID-19 pandemic, it still leaves quite a bit of vacancy. This excess space is prompting companies to explore subletting unoccupied areas of their offices.
Should your law firm do the same?
First Things First
Before you get too attached to the idea of subletting, review your lease to make sure it is allowed. You’ll want to know what restrictions the landlord can apply (such as the types of businesses allowed) before you approach them — and whether seeking permission to sublet will trigger recapture rights.
Assuming you get the green light, here are a few pros and cons to consider.
1. Subletting helps reduce overhead costs.
On average, firms direct 45% to 50% of annual earnings toward overhead costs, with 9% to 12% going toward monthly rent. You can trim overhead costs and redirect some cash toward strategic investments when you sublet office space.
As you explore the possibility of subleasing your unused space, research your firm’s monthly spending on office space, and project how much you can realistically save by bringing on a sublessee. Be sure to account for commercial real estate market conditions in your local area, such as demand and the average price per square foot for commercial space.
- Is your space move-in ready?
- How much will it cost to get the space ready to sublet?
- How much will it cost to reconfigure your remaining office space?
- Will you need a subleasing agent — and if so, what is their fee?
- Consider additional ongoing expenses as well — for example, additional security, maintenance, amenities and insurance costs.
- Can you charge enough rent to make subleasing worth it?
2. Subleasing allows for more efficient use of your current space.
Envisioning how rapidly a firm will grow in five years is difficult. Yet partners are forced to make such projections whenever entering into a lease agreement. You may end up paying for more space than you need or outgrow your space and pay a premium for leasing additional space in a different location.
Subleasing offers the chance to right-size space by renting out unused or lightly used areas of an office. The remaining space can be arranged thoughtfully to improve the overall office experience for employees — catering to the changing needs of hybrid workers.
Before talking to your landlord, meet with other leaders in your firm and gather their opinions on the current office layout and design. Compile their ideas for optimizing your existing space and draft a plan for how the office will be arranged — including any structural, electrical or security features you need to add.
3. Subletting allows networking and collaboration opportunities.
While remote work has its benefits, it also reduces the number of casual encounters and networking opportunities for lawyers and staff. Whether the new tenants are other lawyers, accountants, consultants or digital marketing experts, they likely have capabilities that complement yours. Ideally, your new tenant will become a referral source.
Discuss the types of businesses that would be a good fit for your space and firm culture before seeking tenants. During interviews, learn as much as possible about their business. Center on your firm’s current areas of need and seek out examples of how your new neighbors have helped firms similar to yours in the past.
Once the lease is signed, schedule a meeting with the new tenant to learn more about their work and, if appropriate, host a welcome reception.
4. You are likely on the hook if your sublessee can’t pay their monthly rent.
When you sublet office space, the subletters enter into an agreement with you — not the building owner or property management company. If the subletter has cash flow issues and cannot pay its monthly rent, you are still responsible for paying the rent in its entirety. This is worth considering if your firm has its own cash flow issues.
Vet your new tenant as thoroughly as possible. Ask for financial records and then review them for signs of prior financial distress. If you uncover any troubling signs, do not hesitate to ask the potential subletter clarifying questions to ensure they are the right fit.
Also crucial: Ask a lawyer specializing in real estate law and commercial leases to review the sublet agreement before signing.
5. Watch your back: Sharing office space comes with privacy and security risks.
When you sublet office space to another company or firm, you relinquish some control over your privacy. You will need to take extra precautions to protect your clients and your firm.
Employees of both organizations will undoubtedly come in contact during the workday. And it’s quite possible for employees from your firm to overhear sensitive conversations between your tenant’s employees and vice versa. Documents containing confidential information could also fall into the wrong hands; passwords can be “borrowed.” Security breaches can cause irreparable damage to your business as well as the relationship with your subletter.
Follow strict client confidentiality rules and ensure your cybersecurity systems are up to date. Before the new subletter’s arrival, conduct a firmwide meeting to discuss strategies for protecting confidential information. For example, you might restrict sensitive conversations to behind closed office doors and remind employees not to share certain types of information during casual conversations or elevator rides with the new tenants.
If you sublet to another law firm, ethics rules covering conflict of interest are also an issue.
Check with your malpractice carrier for clauses regarding shared space, too. According to Mark Bassingthwaighte, risk advisor at malpractice insurance carrier ALPS, “Malpractice policies generally exclude coverage for … claims that arise out of or in connection with any act, error or omission committed by an attorney with whom an insured shares common office space and who is not an insured under the insured’s policy.
“So, if your suite-mate gets sued for malpractice and you are named in that suit, but had no involvement with, or perhaps even no awareness of the client who filed suit, don’t be surprised if your insurance carrier says ‘good luck with that.’”
Keep Employee Morale Top of Mind
Before you decide to sublet, it is crucial to consider all employees — not just the partners — and be transparent about your plans. Especially in smaller firms, adding new personalities to the mix can greatly affect morale. (Think carefully, for example, before renting space to a family member.) Listening to employees and getting their buy-in can prevent damage to firm culture and make the transition much easier.
Questions Consider Before You Sublet Office Space
- Does your lease allow for subletting — and will a subleasing inquiry trigger your landlord’s recapture rights, or the ability to take over some or all of your space?
- Will your malpractice insurance premiums increase? What liabilities should you be aware of?
- How will you ensure privacy? Does your office have separate offices with doors that lock, or do you have an open floor plan?
- How will you handle internet and Wi-Fi access?
- What additional security measures will you need to put in place — both physical and online — to protect client confidentiality and prevent data breaches?
- Will conference rooms and other public spaces be part of the deal?
- Will you share a common entrance and reception space?
- What about office etiquette rules — for example, office hours, noise level, number of guests, use of common spaces?
- Will the subletter be responsible for cleaning their space, or will cleaning services be included in the rent? Keep in mind that all vendors with keys or after-hours access to the office should be vetted.
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