CBD Leasing Changes in the Wake of COVID-19

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OPINION: SUBLEASING is on the rise – what does this mean for commercial office tenants and landlords in CBD areas in 2021?

In 2020, subleasing has helped some major CBD tenants to mitigate the effects of COVID-19 on their businesses, and with the threat of further COVID-19-driven lockdowns still looming in Australian cities, it is a trend that is likely to continue in 2021.

With many businesses still assessing how their workforces will operate next year, sub-leasing has emerged as a popular option for companies that are looking to off-load empty office space, often in premium CBD locations.

What is subleasing?

Subleasing takes place when a tenant makes an agreement with a third party to take on part of the tenant’s leased space. It is standard practice that a landlord’s consent is sought in this process, and certain prescribed information is provided to that landlord, before subleasing can go ahead.

For example, if a firm has a tenancy of four floors in a CBD building and they decide they now only need three of those floors, that business would engage an agent to lease an entire floor of their space. When the agreement is signed, it is an agreement between the tenant and the new sub-tenant. In effect, the tenant of the four floors in the office building becomes a landlord to their new tenant (sub-tenant) occupying one of those floors. This is a sub-tenancy. All the obligations of the main lease remain the same.

What are the risks?

For tenants, deciding to sublease their premises can present significant risks, because they remain liable for all their obligations to their landlord, including payment of rent. This has been magnified during the COVID-19 pandemic, because of the increased potential for businesses to fail, affecting not only the tenant, but the sub-tenant as well.

It is extremely important for tenants that are subleasing with the aim of bringing down their expenses, to remember that many other businesses could also be experiencing similar financial pressures, so due diligence on a sub-tenant’s suitability and viability is essential.

Sub-tenants are reminded to pay close attention to their legal documents and know what they are signing up for, to ensure they have the ability for their sub-tenancy to continue should something happen to the tenant.

For example, if the landlord has not granted their consent and something happens to the tenant, the sub-tenant could find themselves in hot water. Without a proper consent deed drawn up and an agreement in place, the sub-tenant may not have the right to the space, forcing them to lose their primary place of business.

By the same token, Landlords should be vigilant and make sure that they have consented to any sub-tenants occupying space. Landlords should consider a direct a relationship with the sub-tenant in-case the existing tenant suffers an insolvency event or breaches the lease and vacates the premises.

The outlook for subleasing

The prediction is for subleasing to increase in 2021, with some observers expecting the CBD’s larger tenants to offload more office space, as staff members continue to work remotely.

For those firms looking to sub-lease space in the CBD, they may be able to secure a very good deal, because rising vacancy rates will mean greater power to negotiate. In the short-term, the subleasing trend may also see those businesses that relocated to fringe CBD suburbs to save money on rent prior to 2020 move back into the CBD.

However, how long those high vacancy rates and cheaper rents will be available, remains to be seen and may depend on the outcome of the predicted interstate migration surges into Queensland. Other factors that could impact rising demand for commercial and retail space in 2021 and beyond include the stability of the COVID-19 containment within Queensland, and the anticipated population growth for Brisbane and south-east Queensland more broadly.

By Kristan Conlon, specialist property lawyer and Partner at McCullough Robertson Lawyers in Brisbane.

Kristan is a real estate lawyer with a corporate background who uses this combined experience to advise on the structuring, development, leasing, acquisition and disposal of all asset classes and tenures.

Kristan’s clients range from large listed institutions, investment banks, developers, affordable housing providers, resource companies, local and state governments, private property owners and national and regional landlords and tenants.

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