Looking to save on rent, share space, or need a shorter lease term? Subleasing a commercial space in the Philippines might be the answer! This guide will walk you through everything you need to know before signing on the dotted line.
What is Commercial Subleasing Anyway?
Imagine you’re renting an office space, but you’re not using all of it. Subleasing is like renting out a portion of your rented space to someone else – the sublessee. You, the original renter become the sublessor. Think of it as being a landlord, but for a space you’re renting yourself! This can be a great way to reduce your own rental costs or make use of an otherwise unused portion of your space. For example, a small tech company renting a large office might sublease a section to a startup needing a more modest workspace.
Why Consider Subleasing in the Philippines?
There are several reasons why subleasing is becoming increasingly popular in the Philippines, especially in bustling business hubs like Metro Manila and Cebu. One major factor is cost savings. Renting commercial spaces can be very expensive, and subleasing allows you to split the costs. Need a smaller office space? Looking to share resources with shared costs? It is ideal for freelancers, startups, and small businesses searching for more affordable prime locations. Think about it: that Makati address might be more attainable through a sublease arrangement!
The Legal Stuff: Philippine Law and Subleasing
Before you get too excited, it’s important to understand the legal side of things here in the Philippines. The most crucial factor? Your original lease agreement. Always check your lease agreement! It usually states whether or not subleasing is allowed. Some leases are very explicit, forbidding it outright. Others might allow it but require prior written consent from the landlord. Failure to comply with these requirements is a no-no, and may lead to penalties, up to and including cancellation of you main lease.
Even with permission, prepare a Sublease Agreement. This is a separate contract to your primary lease that outlines the relationship between you (the sublessor) and your potential renter (the sublessee) and should define the terms and conditions for both parties. It’s wise to get legal counsel here to ensure everything is covered, but generally the basic requirements are: Proper identification of both parties; description of the property; term of the sublease; specific uses; maintenance and repairs; payment terms; dispute resolution mechanisms; and finally, grounds for termination.
Finding the Right Sublease Opportunity
Okay, so you’re ready to find a sublease. Where do you start? Online real estate portals are a great resource. Websites like Lamudi and Zipmatch often have listings for commercial spaces, including those available for sublease. Networking is key, as well, as the market isn’t fully exposed on the internet.
Don’t just look at the price! Carefully evaluate the location of the space. Is it accessible to transportation? Does it have the amenities you need? Consider other factors as well, such as the building’s security, parking availability including elevators if present, and overall environment. Does it fit your business’s image and vibe?
Conducting Your Due Diligence
Before you sign anything, do your homework! Ask the sublessor for a copy of the original lease agreement. Review it carefully to understand its terms, especially those regarding subleasing. You do not want surprises down the road! This includes confirming that the sublessor has written consent from the main landlord, if required. It would be devastating to move in only to find the entire operation shut down immediately.
In addition, thoroughly inspect the space! Document any existing damage with photos and videos before you move in. This will protect you from being held responsible for pre-existing issues later on. Check every corner, electrical outlet, window, and bathroom. The saying that “a picture is worth a thousand words” is critical in documenting pre-existing conditions.
Negotiating the Sublease Terms
Don’t be afraid to negotiate! The rental rate, lease term, and other conditions are often negotiable. Research the market rate for similar spaces in the area to get a sense of what’s fair. For example, if the space has limitations, perhaps due to noise level coming from nearby businesses, adjust your offer to take this into account. The key is to justify the logic to your sublessor.
Lease term is important too! Match your sublease term to your business’s needs. Avoid agreeing to a term that’s too long if you’re unsure about your long-term plans.
Understanding the Costs Involved
Aside from the monthly rental, be clear on what other costs you will incur. Will you be responsible for a share of the utilities (electricity, water, internet)? Are there association dues or other building fees? Clarify how these costs will be calculated and billed. Understanding the full financial picture will help you budget accurately and avoid unexpected expenses, and is often outlined clearly in the Sublease Proposal. Consider, also the impact of additional charges like VAT. According to an online report, VAT in the Philippines can be anywhere around 12% of the gross prices.
Remember to factor in potential costs for renovations and maintenance. Who is responsible for repairs? What if there are major issues, such as a plumbing problem or a broken air conditioner? Address these scenarios in the sublease agreement to avoid disputes later on.
Communicating with the Landlord
Building a good relationship with the main landlord can be beneficial, even though you’re technically subleasing. If possible, meet the landlord and introduce yourself. This can help prevent misunderstandings and foster a positive working relationship. Keep them in the loop about your presence and activities in the space and address concerns immediately.
Follow us on LinkedIn!
If you anticipate needing any changes or improvements to the space, communicate with both the sublessor and the landlord. Get any approvals in writing to avoid potential problems down the line. You don’t want to invest in renovations only to be told later that they’re not allowed!
Managing Your Relationship with the Sublessor
Maintain good communication. A clear and open line of communication with your sublessor is essential for a smooth sublease arrangement. Discuss any concerns or issues promptly and professionally. It can also be advantageous to set up shared communication channels.
Respect the original lease. Remember that you are bound by the terms of the original lease agreement, even though you’re not a direct party to it. Avoid doing anything that could violate the lease or create problems for the sublessor.
Avoiding Common Subleasing Pitfalls
One common mistake is failing to conduct thorough due diligence. Don’t rush into a sublease without carefully reviewing the original lease agreement, inspecting the space, and understanding all the costs involved. Take extra time to vet the sublessor.
Another mistake often found is not understanding the legal implications of subleasing. Make sure you have a solid sublease agreement that protects your interests, and consult with a legal professional if needed.
What happens if the primary landlord doesn’t approve of your sublease?
Well, here is the thing: You can’t sublease if the primary landlord doesn’t approve of it! The best thing is to talk openly with the sublessor and find a mutually agreeable solution. For example, you might have to look for another space that fits your requirements.
Subleasing and COVID-19: Considerations for the New Normal
The COVID-19 pandemic has significantly impacted the commercial real estate market. Many businesses have shifted to remote work, leading to an increased availability of sublease spaces. When considering a sublease in the current environment, factor in the potential for future lockdowns or restrictions. While this measure has relaxed, plan for eventualities. Consider the availability and reliability of internet connectivity, as remote work may be necessary at times. Include a clause in the sublease agreement that addresses potential disruptions caused by future pandemics or similar events.
FAQ Section
Below are some common frequently asked questions to guide you on your leasing journey:
What happens if the sublessor defaults on the original lease?
This can be a risky situation. If the sublessor fails to pay rent or otherwise violates the original lease, the landlord may terminate the entire lease, including your sublease. To protect yourself, include a clause in your sublease agreement that addresses this scenario. You might consider having a direct payment arrangement with the landlord, if possible, to ensure the rent is paid.
Can the landlord increase the rent during the sublease term?
Generally, the rent should remain the same during the sublease term, as agreed upon in the sublease agreement. However, the original lease agreement may have provisions for rent increases under certain circumstances so be sure that you’re thoroughly versed on your primary lease. Review both the sublease agreement and the original lease agreement carefully to understand your rights and obligations. If disputes arise, seek help from a legal professional.
What happens if I need to terminate the sublease early?
Your ability to terminate the sublease early will depend on the terms of your sublease agreement. Some agreements may allow for early termination with a specific notice period or penalty. Others may not allow it at all. Review the sublease agreement carefully and seek legal advice if needed. You may be able to negotiate a termination agreement with the sublessor.
Follow us on LinkedIn!
What are the tax implications of subleasing?
Subleasing income is generally taxable. Consult with a tax professional in the Philippines to understand your tax obligations and ensure you comply with all applicable laws.
What are the benefits for the sublessor as the main tenant?
The main benefit of subleasing is the ability to offset the rental costs, giving you the tenant some relief from the expenses, particularly when a portion of the space isn’t even being used. It can also be a great way to share resources like internet, utilities, and equipment.
What are the ideal businesses for subleasing?
When choosing a business for the space to sublease, always consider the noise, space requirements, and environmental concerns. Some examples of businesses that don’t require excessive heavy equipment would be shared office spaces, retail stores, tutoring centres, and boutique fitness centres like dance studios. Check for local laws and regulations, which may even require you to gain secondary building permits.
References
This following references were used as a foundation for this article, but does not constitute financial, legal or professional advice:
Philippine Laws and Regulations on Lease Agreements.
Real Estate Market Trends in the Philippines.
VAT (Value Added Tax) in the Philippines.
Ready to Find Your Perfect Sublease?
Subleasing can be opportunity to save or scale up while the business demands, but also has its fair share of risks. Now that you’re equipped with knowledge, and you are aware of the things to look out for, and avoid. Take your learnings, and turn them into informed decisions!
Start exploring and consider your due diligence. Good luck with your search, and may you find a sublease that perfectly aligns with your goals!
