A Guide to Subleasing in The United States
A sublease is an agreement between a party who already hold a lease to a property and a separate party looking to rent the property in question, whether that be partly or wholly. For example, a business who leases five floors of office space in a building may look to sublease one of those floors, in the event that they downsize their workforce prior to the end of the initial lease. The party who holds in initial lease is known as the sublessor, whilst the third party looking to occupy a part of the leased space is the sublessee.
How to Sublease
The first step is to check whether you need your landlord’s written permission to sublease a property. This should be outlined in your lease agreement. If subleasing is permitted, the agreement may also specify whether you’re required to give notice to your landlord.
Next, make sure you’re familiar with the legal aspects of subletting in your area, since every state has its own sublet laws that take precedence over lease agreements. You can check state-by-state details here.
It’s important to remember that the main tenant assumes legal responsibility over the sub-tenant, since subletting doesn’t transfer liability to the sub-tenant. This means that if a sub-tenant fails to comply with sublease conditions or falls behind on payments, the main tenant will be liable to the landlord. The same applies to any damages the sub-tenant may cause to the property. This makes it important to thoroughly screen potential sub-tenants.
How Much to Charge
Some states impose rent controls, which set the upper limit to how much you can charge for a property rental. Sometimes, state law doesn’t allow the main tenant to sublet a property for a rate that exceeds what they’re paying to the property owner or landlord.
In locations where rent control isn’t in place, the main tenant can set rental rates. To determine a fair rate, consider:
- The going rates for similar properties in the local area.
- Whether utilities are included.
- The cost of insurance.
- The sublease term or period (shorter subleases often carry a premium).
- Whether the master lease entitles the landlord to keep part of the sub-lease profits.
- Whether the master lease sets a sublease consent fee that the main tenant must pay to the landlord in order to go ahead with a sublet. This can range from hundreds to thousands of dollars and can have an impact on the final rent charged.
- Other costs that may be passed on: If the main tenant uses a broker to represent them in the transaction, broker fees may apply. These are typically calculated as a percentage of the gross rent for the duration of the sublease and are usually in the single digits.
Subleasing During Covid-19
As a result of Covid-related restrictions, many businesses have found themselves with unused commercial space and the number of available sublets has increased significantly.
Unless otherwise stated by the property’s landlord, sublease laws still apply. However, it’s recommended that tenants be more meticulous than ever when screening potential sub-tenants. Eviction bans are still in place in many areas, so an insolvent sub-tenant will be a financial burden on the main tenant. A good approach could involve including a notice of default clause in the sublease agreement.
If only part of the property intends to be sublet, or if space will be shared between the main tenant and the sub-tenant, it’s important to ensure there’s enough space to meet new health and safety guidelines.
The pandemic has also created uncertainty about future space requirements, with many businesses now having to cope with fluctuating head counts. In this scenario, the main tenant may prefer to license the premises instead of subletting it, since licensing allows for more flexibility and agreements can be terminated before the end of the lease term with adequate notice.