Trying to understand common commercial real estate terms can sometimes feel like deciphering a foreign language. It’s enough to make your head spin. Even terms you think you know, like sublease, tend to have more nuance than the average renter is aware. “Of all the rental terms out there, subleasing might be the most confusing,” says Teresa K. Traverse, Rent.com. So, what is a Sublease? How does it work? And when is it beneficial for the renter?
What is a Sublease?
To help you better understand the intricacies of subleasing, here’s United Development Realty Founder and CEO Charles Peacock as part of our What’s That Wednesday short video series, which tackles frequently asked questions about the commercial real estate market.
Charles Peacock: Subleasing commercial real estate is when another party, a subleasee, takes over the tenant’s rights and obligations for a certain space under the original lease. Situations that might be perfect for sublease are when a business needs to move quickly or if a long-term lease is not beneficial, perhaps because they expect a lot of growth in their organization, or other reasons. As a renter subleasing space is usually going to be available below market rate, but you may not be able to stay in the space as long as you need. Or you might incur a large rate increase in the very near future. For more information about subleasing reach out to us. We’re here to help.
Understanding Subleasing & How It Works
A lease is a contract between the property owner and renter, or tenant, that transfers the exclusive possession and use of a commercial real estate property or space to the renter (tenancy) for an agreed-upon period of time. Subleasing is when the renter transfers a part of their tenancy to a third party. However, “the original tenant is still liable for the obligations stated in the lease agreement, such as the payment of rent each month,” explains James Chen, Investopedia. “That means that if a new subtenant does not pay rent for three months, the original tenant that subleased the property is liable to the landlord for the overdue rent amount and any late fees.”
Before subleasing a space, it is important to check the original lease agreement. The property owner may impose restrictions on the right to sublet the premises, such as receiving the owner’s written consent before subleasing. However, if the lease doesn’t explicitly address the topic of subleasing, the tenant can typically sublet the space without seeking the property owner’s permission.
“This is referred to as a sublet permission, where the tenant will either be allowed to sublet the apartment to someone else (the subtenant) with the [property manager’s] approval beforehand or be denied the option to sublet,” says Mike Olson, Legal Templates.. “A subtenant should open clear communication with the landlord to ensure that the tenant is following the proper rules and regulations as stated in the lease.”
Subleasing is also subject to local state laws and regulations. “Different municipalities have varying laws regarding subletting — where most leave it to the [property manager] to decide, some jurisdictions, such as San Francisco or New York City, have guidelines where lease agreements cannot prohibit subleasing under certain circumstances,” explains Olson.
Have Questions? United Development Realty is Here to Help!
Whether you’re still struggling with that big question – what is a sublease – or you just need a little extra guidance, partnering with the right broker can make all the difference. United Development Realty is a licensed and experienced commercial real estate broker in Maryland specializing in real estate consulting. We start by listening to you – your current situation, your wants, and your needs. Then, once we fully understand your business, we can help you review your options and, ultimately, help you make the best decision for your business. Our client-first approach to commercial real estate consulting ensures that your unique needs are met. Please call our office today (locations in Bethesda 240-221-1976 and Fells Point 410-522-1632) to get in touch with a licensed broker.Want to know more about other common commercial real estate terms? Check out our previous blogs covering 1031 Exchange, Cap Rate, Core Factor, Triple Net Lease, or Tenant Improvement Allowance (TI). And keep checking back as we explore some of the most frequently asked questions in commercial real estate.