Like many small business owners, you might be considering the idea of subleasing. Perhaps you’ve rented a commercial building and you have more space than you can use or afford. Should you sublease the unused portion of your rental space to another business? Alternatively, perhaps you’ve found the perfect location for your business but will have to sign a sublease to obtain the space. Are subleases a good idea?
Subleasing has advantages and disadvantages for landlords, tenants, and subtenants. Here are some things you should know before you decide to move forward.
What Is a Sublease?
A sublease is a lease between a tenant who already has a lease and a new occupant. The contract may apply to all of the property leased to the tenant or only a portion of it. When a sublease is signed, the existing tenant becomes the sublandlord and the new tenant becomes the sublessee. The original tenant may be referred to as the master-tenant or prime tenant, and the original lease may be called the master lease or prime lease.
A sublease transfers some of the tenant’s rights to use the property to the sublessee. Although the landlord isn’t a party to the sublease, their consent is usually required before the property can be sublet.
Some businesses may opt to sublease property because they’ve recently downsized their operations and have more rented space than they need. Others, meanwhile, may sublease all of their rented premises so they can move their operations to another location. Businesses may also sublease their rented properties because they are having difficulty paying their rents.
A sublease differs from what’s called an assignment, an arrangement in which the tenant transfers its entire interest in the lease to another party. The new party assumes all the tenant’s rights and deals directly with the landlord.
How Subleases Work
Before subletting rented property, be sure subleasing is permitted by your lease, your landlord, and the law in your state. Some states have no laws regarding subletting, while others require tenants to obtain permission from the landlord before engaging in a sublease. Generally, you can sublease property if neither the law nor the lease prohibits subletting. However, many commercial leases prohibit subletting outright, or allow it only with the landlord’s prior consent.
A sublease can be short term or long term. A short-term sublease generally has a term of six months or less, and its primary benefit is flexibility. It enables the subtenant to try out the rented space without making a long-term commitment. Similarly, the tenant can “try out” the sublessee, then renew the contract if the relationship is successful.
The main advantage of a long-term sublease is stability. It not only allows the subtenant to remain in one place and pay fixed rent for a longer period of time, but enables the tenant to spend less time searching for a subtenant.
A sublease doesn’t affect the lease between the landlord and the tenant. The prime lease remains in effect and is incorporated by reference into the sublease.
Do You Have To Allow Subletting?
Suppose you own a commercial building and your tenant asks permission to sublease the property to another business. Do you have to say yes? The answer depends on the law in your state and the terms of your lease.
Generally, a tenant may sublease rented property unless the lease or state law says otherwise. If the lease prohibits subletting, the tenant cannot sublease the property. If the lease allows subletting with the landlord’s permission, the landlord can’t withhold consent unreasonably.
Whether a landlord’s refusal is reasonable depends on the reasons they cite for the denial. For example, a landlord can’t refuse on the basis that the sublease won’t generate more rent than they’re entitled to receive under the master lease. Likewise, a landlord can’t refuse unless the tenant agrees to renegotiate the master lease. A landlord can reject a sublease, however, to uphold restrictions contained in the lease. For instance, they could refuse to allow a sublease to a restaurant if the lease restricts the use of the premises to retail.
Pros and Cons for Landlords
Subleasing offers both advantages and disadvantages to the landlord.
Helps ensure that the landlord will receive the rent payments
Maximizes the use of the rented premises and prevents space from being left vacant
Subtenants could become reliable prime tenants
Can help landlords who are struggling financially, like during an economic downturn
The landlord has less control over the leased property because they aren’t a party to the sublease
The landlord must rely on the prime tenant to ensure that the subtenant adheres to the terms of the lease
Setting Your Sublease Terms for Success
For a sublease to be successful, the contract for it must contain the right wording. Here are some key details to include:
- A clear description of the property: The contract should clearly define the portion of the property the sublessee will control, its condition, and the purposes for which it may be used. It should indicate whether the property is being subleased in its current condition or subject to improvements made by the tenant.
- Sublease term and rent: The contract should state when the lease begins and ends and the rent owed. It should also specify when rent is due and to whom it should be paid. Normally, the sublessee will pay rent to the tenant.
- Utilities: The contract should specify what utilities are included in the rent and which (if any) are to be paid by the subtenant.
- Sublessee’s default: The sublease should describe the circumstances that must exist for the sublessee to be in default and what actions the subtenant can take to remedy the situation.