Subtenants, coworking members, and flex-space users make up a substantial percentage of the NYC office space market. With the city now in the middle of an unprecedented crisis, it's time to pull out those agreements.
Subleases are often appealing for their discounted rates and plug & play availability. However, the COVID19 crisis has come to expose a major underlying reason why these opportunities trade at a discount, which is the credit exposure that exists among the primary tenant positioned between the Subtenant and Landlord.
Similarly, this issue is perhaps even more pronounced for “members” under flex-space or coworking providers, whose economic viability and acute credit concerns have been widely reported. These companies are currently seeking wide-scale lease modifications and delaying vendor payments while pre-crisis viability concerns about their respective business models grow louder.
The occupancy agreement for your space, whether in the form of a “Sublease” or “License” is subject to the underlying lease held by the primary tenant; meaning as long as the underlying lease remains in effect and in good standing, you’re in good shape.
However, if that underlying lease goes into default (either due to non-payment or other contractual issues), it can be abruptly terminated and any occupants of the space can be technically be removed with the forfeiture of furniture and property in the space. Primary Tenants in risk of default may be missing rental payments, putting your security deposit at risk from being retrieved and leaving you without the sublease rights for which you paid.
While there are many ways to protect against this when negotiating a sublease, the most practical advice for parties already under contractual agreements would be to ensure that the Primary Tenant is maintaining good standing under the lease before issuing further rent payments.
Additionally, it may be worth exploring if the current situation provides an opportunity to convert a Sublease into a Direct Lease with the Landlord.
Want to explore the different options available?