Steps to Subleasing Commercial Property
Subletting a commercial property is similar to assigning one, yet both transfer methods have very different outcomes.
Below are the steps involved in subletting a commercial rental space from a tenant’s point of view.
1. Refer to your Commercial Lease Agreement. Before you can consider subletting your office or warehouse space, you must refer to your Commercial Lease Agreement to see if there is a clause stating your right to do so.
Often, there will be a term detailing your right to transfer a leasehold, although it may require written consent from your landlord. If there is no clause stating the landlord’s policy on subleasing, consult with them about your options.
2. Provide notice. You may be required to provide advance notice to your landlord that you are transferring rights to another renter. If your lease clearly states your ability to transfer, adhere to the notice time mentioned.
3. Find a tenant. If possible, screen tenants until you find a suitable renter. Because you are liable for their tenancy, it’s vital to make sure they have a reliable renting history.
4. Draft and sign a Commercial Sublease Agreement. Once you have found a trustworthy prospect, you must draft a Commercial Sublease Agreement to address the terms of their tenancy. You are now referred to as the sublandlord, and the new tenant becomes the subtenant.
As mentioned, the master lease still stands between you and your landlord, but you are now responsible for the subtenant’s tenancy. While most of the terms in the Sublease Agreement will mirror the lease, the sublandlord has flexibility in determining several aspects, such as rent/utility price, insurance, damage deposit, improvements, lease term (automatic renewal or fixed), property purpose, inspections, and any other additional clauses. Discuss the terms of the sublease with your landlord to ensure they approve.
For arrangements that involve subletting a portion of your commercial space, ensure the space is clearly described in the sublease.
Sign the agreement with the subtenant and restate the terms to confirm their acknowledgement and understanding of the tenancy.
5. Carry out the sublease. As the sublandlord, you are liable for the subtenant. For example, you are responsible for collecting rent and for any damage caused during their tenancy.
In addition, the subtenant would contact you to take care of any of the landlord’s obligations, and it would then be your job to approach the landlord. Essentially, there is little to no legal relationship between the subtenant and landlord.
Pros to Subleasing:
- You are able to quickly transfer partial rights of a commercial property to save money on rent expenses. This will prevent you from breaking a lease term, or having to pay out the remainder of the lease.
- You get to be flexible in your sublease contract.
- If you are sharing a space, you may benefit from shared resources or customers, networking, reduced carbon footprint, and workplace diversity.
Cons to Subleasing:
- You may be adding to your workload by managing a tenant, in addition to your own landlord-tenant relationship.
- You are liable to the landlord for damages or lease violations that occur from the sublease.
Over the past several years as businesses struggle to ride out the tough economic times, they have had no choice but to downsize. Tied to commercial leases for more office or retail space than they need, an assignment of the lease or the subletting of the extra space seems like an attractive way of saving on expenses. In making the decision whether to assign or sublet, the tenant should first carefully examine its lease to determine whether the lease contains any provisions prohibiting or restricting assignment or subleasing. Commercial leases, like any other contracts, are governed by their terms. Therefore, whether a tenant has the right to assign a lease to another party or to sublet the leased premises to another tenant depends on the language of the tenant’s lease with the landlord. If the lease does not contain language prohibiting or restricting the assignment or transfer of a tenant’s interest, a tenant is free to assign or transfer all or part of its interest. A tenant is not required to obtain prior consent of the landlord, unless the lease contains language requiring the tenant to obtain prior consent of the landlord.
In making the decision whether to assign or sublet, the tenant should also understand the legal differences between the two concepts. An assignment of a lease is the transfer by the tenant of all of the tenant’s rights and interest in the lease. In an assignment, although the assignee tenant effectively steps into the shoes of the assigning tenant, the assigning tenant continues to remain liable to the landlord on the lease. With an assignment, if the assignee breaches, the landlord has the right to enforce the terms of the lease against the assigning tenant or the assignee tenant.
A sublease is different from an assignment. A sublease is a separate contract between the transferring tenant and the subtenant. The sublease may transfer all or a part of the leased premises, for all or a part of the lease term, and under terms that are similar or materially different from the lease. As with an assignment, the tenant remains liable to the landlord on the original commercial lease. With a sublet, the landlord does not have a legal right to enforce the terms of the original lease or sublease against the subtenant in the event of breach.
There are many different practical and legal considerations involved in negotiating and documenting the terms of an assignment or sublease including the legal consequences to the tenant under the assignment or sublease if landlord terminates the lease. Therefore, an experienced real estate attorney should be consulted so that the parties understand the consequences of such transactions and their competing interests are protected.