You might have heard of the terms sublet and sublease. However, the real estate industry has plenty of jargon, and you might be confused about the meaning of these two terms.
That’s okay because we’re going to make it easy for you!
The Difference Between Sublet and Sublease
Sublet and sublease are generally two different words that mean exactly the same thing. For example, the words lease and let both mean renting out a property, but the word let is more common in British English than U.S. English. Therefore, in essence, the two words mean the same thing.
What does it mean to sublease or sublet a property?
We’ve established that sublease and sublet are generally the same concepts. Nonetheless, what do they mean in the real estate industry? When a company subleases or sublets a property, they rent the property out to another tenant.
Therefore, the company that holds the original renting agreement with the property’s landlord will rent the property to a new tenant. Subleasing and subletting are generally very common, but why would a company do this?
Generally speaking, a tenant would choose to sublease or sublet a property if they cannot use the property all the time. For example, if the tenant is out of the country for three months per year, they might choose to sublease or sublet the property for those three months. It’s almost always a better option than breaking the original lease agreement and having difficulties with the landlord.
The original tenant is often responsible for collecting the rent from the new tenant, which sometimes presents issues.
Since the COVID-19 pandemic began in early 2020, offices around the United States have become empty. Subletting space has increased by 91% since 2019, and tenants are becoming desperate to sublet their offices because of business changes.
The main benefits for the subtenant
On the surface, it may seem like subleasing is a tricky proposition. Renting is sometimes a complex thing, and the idea of subleasing adds more complexity to the process. However, there are significant benefits for the subtenant and sublessor.
1. A short-term solution
The nature of running a business can be unpredictable, and the last year has proved that. Therefore, a company may opt for a subtenant agreement over a long-term lease. Some companies are seasonal, and long-term rental commitments make zero sense.
For example, what’s the point of committing to a long-term lease if you’re a fast-growing start-up business? You might need to upgrade your office within months, presenting many problems if you’ve signed a long-term lease.
Of course, when a company ties itself into a long-term lease, it will have to commit to that lease. That’s even if circumstances change or the company needs to make changes. Commercial lenders often want five to 10-year agreements, which is too long for some companies. In that case, becoming a subtenant has excellent benefits because of its flexible nature.
3. More options
A company might find more options in the real estate rental market if they’re willing to consider a sublease. For example, a company may find more size options and better locations when they become a subtenant.
4. Better prices
A company is always looking to cut unnecessary costs, and office space is one of the most manageable costs to reduce. Therefore, becoming a subtenant almost always means that you can find better prices than signing a long-term agreement.
Therefore, if you’re running a company in a competitive industry or your company has very tight profit margins — you should consider the economic benefits of becoming a subtenant over a long-term lease.
The main benefits for a sublessor
1. Greater flexibility for growth
There’s nothing worse than your circumstances changing and needing not being able to cancel a rental agreement. For example, what if your business grows faster than you expected? Mark Zuckerberg didn’t expect Facebook to become a multi-billion dollar empire.
As a result, you might need more office space or better office facilities. However, you have one problem, you can’t end the rental agreement in your current office. In that case, you should consider becoming a sublessor and allow another company or private individual to pay the rent for you.
2. You’ll avoid disagreements with your landlord
Nobody wants any problems with their landlord. Nevertheless, when a company doesn’t grow as expected, it might have difficulties paying the rent. That’s when becoming a sublessor can prevent you from breaking any rental agreements and giving your company a bad reputation.
You’ll rent the property out to a subtenant and downgrade your office space to something more suitable. In essence, the flexibility of becoming a sublessor can prevent many uncomfortable headaches.
The main benefits for the landlord
1. Landlords still get the rent payments
As a landlord, the last thing you want is a tenant not paying rent. It’s an utter headache, but it’s not uncommon either. Landlords face enormous costs and stress when a tenant is failing to meet their rental agreement. That’s where subletting offers tremendous benefits to the landlord.
Rather than going to court, paying legal expenses, and going through stress, you could get your tenant to sublet the property to another tenant. It’s almost always the best option for all three parties.
2. The law will protect landlords
A landlord needs to sign a well-drawn-up legal agreement if their tenant is subletting to another tenant. As a result, this can protect landlords from a massive array of potential legal issues.
Landlords must define the responsibilities of each party in the legal agreement. That will ensure the law protects landlords from legal pitfalls.
Three downsides of subletting or subleasing
Although there are many benefits to subletting or subleasing, there are downsides as well. You should be aware of the following downsides before you consider a subletting agreement.
- A subtenant might break their agreement – Although most subtenants will honor the subtenant agreement, that’s not always the case. If the subtenant fails to keep their rental agreement, there’s a chain of issues between all three parties. It becomes a massive headache for the landlord and the sublessor.
- The subtenant might damage or steal your property – Anything you leave in the office could be subject to damage or theft. Although it’s unlikely, it’s one of the most significant issues and one of the risks of subletting your rental agreement to another tenant.
- Finding a good tenant can be challenging – The most important thing for a sublessor is finding a reliable tenant. However, that’s not always straightforward and can cause various problems. You need a subtenant to honor their agreement, pay rent on time, and respect the property.
What are the responsibilities of each party?
The landlord is often aware that their tenant is subletting a rental agreement in commercial real estate. If that’s not the case, the law considers this an illegal sublet. The subtenant will need to abide by the same rules as the subtenant.
Furthermore, the landlord will often decide how the subtenant pays the rent. In many cases, the landlord will let the sublessor handle the rent costs. Of course, that leaves extra responsibility in the hands of the sublessor. But that’s one of the downsides of subletting your rental agreement.
What are the steps to subletting a property?
- Confirm that subleasing is the best option for you – As we’ve already established, subleasing comes with some downsides. If you’re looking to avoid any repercussions, you should first confirm any other options.
- Examine your lease agreement – A sublessor should examine their lease agreement thoroughly before signing any agreements. There are various essential things to consider, including lease terms, legal technicalities, maintenance costs, and anything else that could be a potential problem.
- Tell the landlord – Most landlords will accept a subletting agreement if it prevents any legal headaches. However, some tenants still avoid telling their landlord about their desire to sublet their property. As a result, it becomes an illegal sublet, which is a massive no-no.
- Find a good tenant – Finding a good tenant can be a real challenge. However, it’s vital. Tenants should vet the company or private individual before they sublet the property. That includes verifying their income, history, and previous references.
- Complete the sublease – After completing the due diligence, you’re ready to sign the sublease. Therefore, you’ll need to agree to the following:
- Agree to the total rent due every month
- The term of the sublease
- Determine late fees on late rental payments
- Finally, cover all the agreements on bills and utility payments
After you’ve completed these steps, you’re ready to sublet the office and move out.
Subleasing and subletting could be excellent options depending on your circumstances. For example, if you’re struggling to pay rent or your circumstances are changing — a sublet agreement could be your savior.
Furthermore, subletting agreements provide some excellent benefits to landlords and subtenants. With that said, ensure you complete all due diligence and figure out the best option for you.