An Introduction To Office Subleases
A sublease is when a tenant (overtenant) rents their space, or part of their space, to another tenant (undertenant). Typically a sublease is for the entire period of time remaining in the overtenant’s lease, but can be shorter. Extensions can also be negotiated between the undertenant and landlord, especially if there is relatively short amount of time left on the sublease term.
Subleases must always be subject to the terms of the master lease between the overtenant and landlord. These terms cannot be changed, but the undertenant can, and should request a copy of the master lease to review as part of their due diligence.
Subleases are more common than assignments because in an assignment, the landlord absolves the overtenant of any responsibility. In a sublease, the landlord is still entitled to the rent from the overtenant even if the undertenant is not paying.
Here are some differences between leases and subleases:
- Subleases are usually not flexible on term. For example, if there are 26 months left on a lease, that will be the only possible term the overtenant will consider. They will not consider a 24 month term since it’s very unlikely (and difficult) to find another undertenant for the last two months. They won’t consider a 36 month term since they are unable to sublease the space for a longer term than they have the rights to the space.
- Subleases are almost always leased in as-is condition. Landlords will often do some renovations as part of a deal with a new tenant. Overtenants are usually not interested in the responsibility of construction work and are not as well-equipped to do it. In certain situations, especially if the space is not in move-in condition, undertenants can negotiate a substantial rent concession in exchange for sparing the overtenant from doing any work.
- Subleases are more often furnished than direct leases. This is because the existing tenant is (or was recently) operating out of the space, no longer needs or wants it, and therefore may no longer need or want the furniture that’s in it. Although new furniture can be expensive, it is difficult and not very lucrative to sell used furniture so if it can provide an incentive for an incoming undertenant, the overtenant is usually willing to give the furniture away with the space.
- Subleases can often require higher security deposits than direct leases. One important reason is to protect an overtenant from a subtenant defaulting with a very short term on the lease. For example, if an undertenant defaults with 10 months left on the term, the overtenant is most likely out of luck for the 10 months (whereas, if it was a direct lease, the landlord could lease it for any term length once the tenant defaulted). Another important reason is a holdover clause. Since most leases have a holdover clause that keeps a tenant responsible for 2-3 times the rent if they holdover, an overtenant needs to protect themselves from an undertenant overstaying their welcome and the landlord charging them as a result. This is especially important in a below-market sublease since the overtenant is being charged holdover rents on their higher rent, rather than the undertenant’s discounted rent.
and clarification on some common misconceptions about subleases:
- Subleases are cheaper than regular leases. This is true in some cases, but not always the case, especially if the subleases have an above-standard installation and if the market has picked up since the overtenant signed their lease.
- In a sublease, you pay the overtenant the same amount they are paying the landlord. An overtenant has the right to charge any amount more or less than the rate they are paying. They often will not reveal the amount they are paying the landlord and an undertenant is not entitled to know the rent an overtenant pays (but sometimes will know).
- Subleases are usually from companies that are desperate and about to go out of business. If a company is in bleak condition, they will typically dissolve and break the lease rather than sublease. It’s also risky for an undertenant to sublease from a shaky overtenant because if they overtenant defaults, the undertenant’s office is now in jeopardy and subject to the landlord’s discretion. Often, subleases are from companies that have outgrown their spaces (and are doing very well).