Subleasing Commercial Space: 4 Pros and Cons to Know

Shanti Ryle

June 28, 2024

A for lease sign in an empty office building

Subleasing commercial space is becoming an increasingly popular strategy for businesses looking to maximize their investments and minimize costs. By understanding the pros and cons of subleasing, landlords and tenants can make informed decisions that benefit their bottom line.

However, it's crucial to understand what's involved before diving in. Consider a scenario where a thriving tech startup outgrows its commercial space but is locked into a long-term commercial property lease for office space. Instead of incurring hefty penalties for breaking the lease, the company asks for a commercial sublease, transferring some or all of its space to another business. This move not only helps the startup manage its growth but also reduces financial strain.

But is subleasing commercial space right for every business?

In this blog post, we'll explore the pros and cons of a commercial sublease agreement from both the lessor's and lessee's perspectives. We'll also discuss practical tips for finding suitable subtenants for commercial space and ensuring smooth transitions.

What is a Commercial Sublease?

A commercial sublease agreement – often found in a master lease - involves a tenant (the lessee) renting out part or all of their leased commercial space to another business (the subtenant).

This arrangement allows the original tenant to manage surplus space and share financial responsibilities while the subtenant benefits from potentially lower rent and shorter commercial lease terms compared to a direct lease with the landlord.

Subleasing can be advantageous for businesses facing fluctuations in space needs, such as those experiencing rapid growth or downsizing. By subleasing excess space, tenants can offset rental costs and avoid the financial strain of unused property.

However, it’s essential to note that not all commercial leases permit subleasing, and landlords may charge additional fees to compensate for the increased risk and administrative burden associated with having multiple tenants.

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How Does Subleasing Work?

A commercial sublease agreement can present significant benefits for both tenants and landlords. This section will clarify how sublease agreements work, covering rent payments, the landlord’s role, and the differences between subletting and assignments of the original lease.

Rent payment structure

In a commercial sublease agreement, the subtenant typically will pay rent to the original tenant (the lessee), who remains responsible for paying the landlord. This means that even if the subtenant fails to pay their rent on time, the primary lessee must still fulfill their financial obligations to the landlord. It's essential for the original tenant to conduct thorough background and credit checks on potential subtenants to mitigate the risk of non-payment.

Role of the landlord

Most commercial leases require the original tenant to obtain written approval from the landlord before subleasing any part of the property. This helps ensure that the subtenant meets the landlord’s standards and that the property is adequately maintained. Landlords may also charge a fee for subleasing to compensate for the additional administrative work and potential risks involved.

Subletting vs. lease assignment

Subleasing should not be confused with a commercial lease assignment. While subleasing allows the tenant to remain on the original lease and continue fulfilling their contractual obligations, assigning a lease transfers all these responsibilities to a new tenant.

In a commercial lease assignment, the new tenant pays rent directly to the landlord and assumes full responsibility for the leased property. This option can be attractive for tenants who want to exit their lease agreements fully, but it requires landlord approval and a formal transfer of rights and obligations.

Additional considerations

When considering a commercial sublease agreement, it's essential to review the terms and conditions of the existing lease agreement to ensure subleasing is permitted. If allowed, clearly define the responsibilities of all parties involved, including maintenance duties and liability for damages. Effective communication between the original tenant, subtenant, and landlord can help facilitate a smooth subleasing process and prevent potential disputes.

Several people sit around a table reviewing a lease agreement with water, paper, and a phone lying beside them

The Pros of Subleasing

Commercial subleasing offers several advantages for a landlord (lessor) and a tenant (lessee):

For the lessor

Maintained occupancy: Subleasing helps maintain occupancy levels, ensuring that the space remains utilized even if the original tenant needs to downsize or relocate part of their operations.
Reduced risk of vacancy: By allowing subleasing, landlords can reduce the risk of having vacant spaces, thereby maintaining a steady stream of rental income.
Enhanced tenant stability: Tenants permitted to sublease may be more likely to stay and fulfill their lease obligations, as subleasing provides greater flexibility to manage their space needs.
Potential for higher rent: In some cases, landlords may be able to negotiate higher overall rent by approving subtenants who might pay a premium for shorter lease terms or desirable locations within the property.
Administrative fees: Landlords can charge administrative fees for processing sublease agreements, generating additional revenue and covering the costs of managing multiple tenants.

For the lessee

Cost savings: Subleasing allows tenants to offset rental costs by sharing the financial burden with a subtenant, making managing larger or underutilized spaces more affordable.
Flexibility: Subleasing provides tenants with the flexibility to adapt to changing business needs, such as downsizing or expanding, without breaking their lease agreement.
Reduced financial risk: By subleasing, tenants can mitigate the risk of paying for unused space, especially during economic downturns or periods of business contraction.
Contract fulfillment: Subleasing enables tenants to fulfill their lease obligations even when their space requirements change, preventing potential penalties or legal issues associated with breaking a lease.
Networking opportunities: Sharing space with subtenants can create opportunities for networking and collaboration, potentially leading to new business partnerships or synergies.

People walking fast in front of a commercial building

The Cons of Subleasing

While subleasing offers notable benefits, it also comes with potential drawbacks for both landlords and tenants:

For the lessor

Less control over tenants: Allowing subleasing can lead to less control over who occupies the space, potentially resulting in tenants who may not align with the property’s standards or community.
Increased administrative burden: Managing sublease agreements adds an extra layer of administrative complexity, requiring additional oversight and potential conflict resolution between the tenant and subtenant.
Potential for lease violations: Subtenants may inadvertently violate lease terms or property rules, leading to legal complications or harm to the property’s reputation.
Uncertain financial stability: Subtenants may not have the same financial stability as the primary tenant, posing a risk of default on rent payments.
Decreased property value: Frequent changes in occupancy or misuse of the premises by subtenants could negatively impact the property’s overall value and appeal to future tenants.

For the lessee

Responsibility for the subtenant's actions: The primary tenant remains accountable for any damages or lease violations caused by the subtenant, which can lead to potential legal and financial repercussions.
Difficulty finding suitable subtenants: Locating a reliable and suitable subtenant who meets the landlord’s approval and aligns with the original tenant's business needs can be challenging and time-consuming.
Potential for conflict: Subleasing can create disputes between the tenant and subtenant over shared spaces, responsibilities, and terms of the sublease agreement, potentially leading to disputes.
Risk of subtenant default: If the subtenant defaults on rent payments, the primary tenant is still responsible for covering the full rental amount, which could strain their finances.
Impact on lease renewal: Subleasing might affect the tenant’s relationship with the landlord and influence the landlord’s decision when considering lease renewals or future lease negotiations.

Decorative image of commercial real estate buildings

Practical Tips for Subleasing Success

Successful subleasing requires careful planning and clear guidelines to ensure a positive experience for both landlords and tenants. Here are some practical tips for landlords to consider when allowing tenants to sublease their commercial space.

Conduct thorough background checks

Before approving a subtenant, landlords should conduct comprehensive background checks or require the subleasing tenant to do so. This includes reviewing financial stability, credit history, and business reputation to ensure the subtenant is reliable and capable of fulfilling lease obligations.

Create a detailed sublease agreement

A well-drafted sublease agreement is crucial for avoiding misunderstandings and conflicts. This agreement should clearly outline the responsibilities of the tenant and subtenant, including rent payment terms, maintenance obligations, and adherence to property rules.

Establish clear communication channels

Effective communication between the landlord, tenant, and subtenant is essential for addressing issues promptly. Landlords should establish clear communication channels and set expectations for regular updates on sublease arrangements.

Include sublease terms in the original lease

To avoid complications, landlords should include specific sublease terms in the original lease agreement. These terms can stipulate conditions under which subleasing is permitted, the approval process, and any associated fees or requirements.

Schedule regular property inspections

Regular property inspections can help landlords monitor the condition of the leased space and ensure compliance with lease terms. Scheduled inspections provide an opportunity to address maintenance issues early and reinforce the importance of property care to both the tenant and subtenant.

Require adequate insurance coverage

Landlords should require the tenant and subtenant to maintain liability and business insurance coverage. This ensures that any potential damages or liabilities are covered, protecting the landlord’s investment and minimizing financial risks.

Provide subtenant orientation

Providing an orientation for the subtenant can help integrate them smoothly into the property. This orientation can cover property rules, emergency procedures, and contact information for property management, fostering a cooperative relationship from the start.

People standing looking out at a city view in a commercial office building

Subleasing: Weighing the Pros and Cons for Your Business

Wading through commercial subleasing can be challenging, but understanding the potential benefits and drawbacks is essential for making an informed decision. Whether you are a lessor looking to maximize your investment or a lessee seeking cost-effective office space solutions, a commercial sublease offers unique opportunities.

For lessors, subleasing can provide a steady income stream and flexibility without breaking the original lease. Lessees, on the other hand, can benefit from reduced rental rates and shorter lease terms that align with their business needs. However, both parties must carefully consider legal implications and vet potential subtenants to avoid complications.

Before entering into a commercial sublease, weigh the pros and cons, review all lease agreements thoroughly, and follow best practices for a successful subleasing experience. With the right approach, a commercial sublease could be the strategic move your business needs to thrive.

When you’re ready to find a commercial space for rent, Crexi is your number one resource.

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