What is a sublease?
If you read a recent news article on sublease inventory and were left scratching your head, read on for my latest installment of Development Jargon on the Sublease.
In the following paragraphs I will walk through what a sublease is, how it is used strategically by tenants leasing space and tenants putting their space on the market, and will give a few items to watch out for when dealing with a sublease.
Disclaimer: This article is for informational purposes only and is not legal or leasing advice. If you have questions about a specific sublease consult your broker or attorney.
A sublease is a structure where a tenant is leasing space from a tenant instead of a landlord.
Master lease
In the case of a sublease the tenant who is putting the sublease space on the market – the sublessor – holds the master lease for the space with the landlord. The master lease agreement doesn’t change because of the sublease. The sublease is subordinate – has lower priority – to the master lease. Hence the name, sublease.
The sublessee is the tenant who is subleasing the space from the sublessor.
Characteristics of a sublease
A sublease is typically short term, by definition it is no longer than the term of the master lease.
Sublease space also typically comes “as is” which sometimes means the space is already furnished. Sublesees rarely receive any tenant improvement allowance.
Move-in times for the sublessee can be quick if the space is move-in ready.
The rental rate on a sublease that a sublessee pays a sublessor is often less than the rental rate that the sublessor is paying the landlord. This rate difference is often caused by the fact that the sublessor is motivated to get their vacant space filled up. They have to pay their rent to the landlord no matter what.
Why Sublease?
A sublessor may put their space on the market for a variety of reasons. Sometimes they are moving to a new space and have remaining term left on their lease. Sometimes they leased too much space and did not grow into it at the rate they expected. Sometimes they are simply downsizing their space requirement.
A sublessee may want to lease space because they need a shorter lease term than market average, because they are not sure how much space they will need in the long term, or if they are looking for move-in ready space
Risks of a sublease
The two largest risk considerations with a subleased space are default risk and access/security.
Because the master lease is between a sublessor and the landlord, in the event that the sublessor defaults – or breaks the terms – on the master lease the sublessee has very limited protection. Most often if the tenant you are leasing space from stops paying their rent, you will need to leave. Regardless if you are able to pay your rent to the sublessor or not.
Access and security pose another potential risk. If you are sharing space with a sublessor or sharing a common area, as a sublessee you want to make sure you understand who has access to which spaces.
Conclusion
Subleasing space can be a convenient way for a sublessor to reduce their overall rent burden. It can also be a convenient way for a sublessee to find short term space that can be move-in ready.
The amount of sublease space available in the market can also be a measurement of overall health of a market. Because of the long term nature of commercial leases, an increase in sublease inventory can sometimes be an indication of a weakening market.
Just remember, if you are considering subleasing space, having a lease agreement with a sublessor is not the same as having a master lease on the space with the landlord.
